November 6, 1941

NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

That is the same thing.

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

The problem presented by the municipalities is only one of a large number of difficulties which have presented themselves as the conferences have proceeded. There are a great many intricacies and difficulties in points of detail which require patience and take a great deal of time, if results fair to all governments are to be obtained.

I come now to a matter which will take some time, and perhaps I had better ask that it be called six o'clock.

At six o'clock the committee took recess.

After Recess

The committee resumed at eight o'clock.

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Mr. Chairman, at six o'clock I stated that I was coming to a division in my speech and would be taking up another subject at eight o'clock. The subject to which I referred was the price-ceiling policy adopted by the government. This policy has been dealt with in a broadcast by the Prime Minister to the Canadian people, and it will not be possible for me to add very much, in my remarks to the committee to-night, to what the Prime Minister said in that speech. The leader of the opposition, however, invited the Minister of Finance to make some further explanation of certain phases of the priceceiling policy to the committee when that matter was reached, and I thought it might not be inappropriate if I should tell the committee in very plain and simple language just why the pride-ceiling policy was recommended to the government by myself and why it was adopted by the government.

This policy was not based on any fine-spun theories or abstract considerations; it was based upon the harsh necessities of the moment. Consider what was happening. I have before me a table showing the rise in the price level from August, 1939, to October, 1941. I shall place this table on Hansard, but before I do so I think I should point out to the committee some of the important features of the table.

Taking the average of 1935-39 as the base, and calling that 100, the index figure of cost of living for August, 1939, before the war began, was 100-8. In November, 1939, after three months, it was 103-8. In February, after six months, it was 103-8. In August, 1940, after one year, it was 105-9. In February, 1941, after eighteen months, it was 108-2.

For the following months the figures were as follows:

March, 1941 108-2

April, 1941 108-6

May, 1941 109-4

June, 1941 110-5

July, 1941 111-9

August, 1941 113-7

September, 1941 114-7

October, 1941 115-5

In October the cost of living index figure was 14-6 per cent above what it was in August, 1939. The increase in the last six months was 6-9 points of the index. The increase in the index of the cost of food from August, 1939, to August, 1941, was 23-9 and for the last six months 13-1 points, indicating that the very substantial increases in the cost of food were largely responsible for the less

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Finance-Mr. Ilsley

substantial but nevertheless substantial increases in the cost of living index. Of the 12-8 per cent increase in the total index from August, 1939, to August, 1941, the increased cost of food accounted for more than 53 per cent of the change.

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NAT

Karl Kenneth Homuth

National Government

Mr. HOMUTH:

Would the minister indicate just what items are taken into consideration in figuring the cost?

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I do not think I can stop to do that; I have not the material here; it would be a long story and involve me and the committee in a great deal of detail. I think answers to questions like that should be reserved for a later stage.

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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

If I may interrupt, does it indicate that the average of 1935-39 which the minister takes as the base was a high price level in food, or was that not a very low level?

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LIB
NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

So that an increase of 15 to 20 per cent would not necessarily indicate a high price level?

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

Not necessarily. It indicated a fairly rapid rise towards the latter part of the period.

The extent of the rise itself perhaps was not the most serious feature of the situation. The most serious feature was that there were certain obviously inflationary forces at work in the country. I am not an economist and I am certainly not a "brain-truster", to use the language of hon. gentlemen opposite-

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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

For- lack of a better word.

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NAT
LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

-and probably I shall oversimplify somewhat my explanation of the inflationary forces. But there is no doubt that when the resources and labour of the country are pretty fully used, when we reach a stage of full employment, and are making more and more war materials, devoting a larger and larger proportion of our human and material resources to the production of war equipment and war materials, there is no doubt that inflationary forces of a very powerful type are at work. Now this is the way in which Mr. Henderson, head of the office of price administration and civilian supply, explained the matter. Perhaps he oversimplified it too, but it is well to make these matters as simple as possible, and essentially this is correct: if the total work done by the people of the nation is represented by eight hours, and three hours of that work is devoted to war purposes and only five hours to the produc-

tion of peace-time goods, civilian supplies, then there are eight hours' wages to be spent on the product of five hours' labour. Therefore, unless something is done to channel back the wages for the other three hours, there is going to be such a disparity between purchasing power and what there is to be purchased that there will be a most powerful upward pressure on prices.

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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

That is, freer buying.

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

There is far more money to spend, and less to spend it on. As we devote more and more of our goods to war purposes, that condition develops. Those are the essentials of the situation in a war such as this, and at a time when we are making such' enormous quantities of goods. Surely the committee was impressed by the speech of my colleague the Minister of Munitions and Supply in which he showed the colossal output we now have, and indicated that it would be still larger in the future.

One will see at once that, unless curbed, forces will push the price levels up and up and up. How can that be stopped? Since the beginning of the war we have pursued a severe taxation policy. We have tried to tax as much as possible of the purchasing power back into the exchequer. We have gone all across the country and combed it for small subscriptions to war savings certificates. We have sold bonds to the people. In these ways, namely by taxing and by borrowing, we have tried to get back from the people a large amount of this purchasing power. We believed that this was a right policy and we believed that it was anti-inflationary. To a large extent it is.

But we cannot do enough in that way. The amounts we are getting, as the requirements grow, are not sufficient. As the two hours out of the eight becomes three hours, and as the three hours becomes four hours, it becomes impossible adequately to meet the situation by taxation and borrowing. We might possibly be able to do it if we placed oppressively high taxes on the people.

I have in mind, by way of example, a national defence tax of, say 20 per cent, instead of 5 per cent, or something like that. But a tax of that kind would be so inequitable, and the variation in individual circumstances would be so great, that we would have all kinds of outcries, and justifiably so, on account of the harshness and inequality of a taxation policy of that kind. It does not help the situation much to say, "Change it into a compulsory saving policy; pay back part of

The War-Finance-Mr. Ilsley

the taxes at the end of the war", because for the moment it is just as harsh and inequitable, and just as hard to bear.

Therefore in this war, no matter what the course has been in previous wars, so far as I know all countries have come to the conclusion that they must resort to direct measures of limitation and control of production, and price control. We had decided, of course, that we had to do the same thing in Canada. We have had certain selected price controls in force since shortly after the outbreak of the war.

Neither the house nor the country will accept a policy such as this price-ceiling policy, unless they are thoroughly convinced of the evils and the dangers of inflation. I have refrained from arguing that inflation is bad, because I can find no one to disagree with me. I have listened to the social credit group. We have argued that their policies are inflationary. The speakers in that group, to a man, do not meet that argument by saying, "What of it? They are inflationary, but it is a good thing." No, they do not say that; they deny that their policies are inflationary. They admit, and properly so, that inflation is a bad thing, and they argue that their policies are not inflationary.

Coming to the Cooperative Commonwealth Federation we find that to a man they argue against inflation. The hon. member for Vancouver East (Mr. Maclnnis), who made such a good speech the other day, never for a moment in the labour circles in which he moves, or in or out of this house, would argue in favour of inflation. He knows that inflation is disastrous to labour. The same could be demonstrated without any trouble at all in so far as its effects on agriculture are concerned.

Then, we find that the Conservative group admit and contend that inflation is a bad thing, and the same is true of the members of the party to which I belong. But sometimes I think that this ready acceptance of a principle leads us to forget the realities of the situation.

Now, looking at the matter from other than the theoretical point of view, looking at it from the point of view of governmental finance, let us consider what would happen if the price levels were allowed to go up and up and up in an uncontrolled fashion. Last spring I asked the house for a vote of $1,300,000,000 for war purposes. The house voted that sum. Then, in addition we had to have money for non-war purposes. I believe the amount was in the neighbourhood of $500,000,000. In addition, we had to raise money required for assistance to Great Britain, to the amount of $900,000,000,

making $2,700,000,000 or $2,800,000,000 in all. When I come to the house next spring, perhaps in the early months of the year, it may be that the figures I shall present will be higher than that. It may be-and I do not know, because the estimates are not yet prepared-that instead of being obliged to raise $2,800,000,000, as we are doing this year, and instead of being obliged to spend $2,800,000,000 as we are likely to have to do in this fiscal year, we might have to spend, let us say, $3,000,000,000. It is, I should think, certain to be that, perhaps a great deal more than that. Let us say that the price level rises 20 points, or 20 per cent- and the price level did rise 20 points, or just about 20 per cent, in the third year of the last war. I have figures here to show what happened at that time. That condition makes it necessary for me to obtain another $600,000,000 somewhere. I do not know anywhere to get it, except by taxing the people, borrowing from the people or creating it. Borrowing from the Bank of Canada would be the equivalent of creating it. We have, so far as I know, to do one of those three things.

I do not think taxation will stand indefinite expansion. I do not believe that borrowing can be carried on indefinitely, because when the price level is rising rapidly and the value of the dollar is going down we are going to meet quite a bit of resistance from the people of the country who may be afraid that if that process continues they will be paying in good money and getting out bad. We are determined that this will not occur. We must do that in order to keep faith with the people who lend money to the government. Therefore we are going to have difficulties if we create money. If we borrow it from our own bank, which is the equivalent of issuing it, we are going to go very far toward undermining confidence in our currency, and toward pushing up the price level and creating still greater difficulties for ourselves. That very point of view of governmental finance is a question. That is the problem as it presents itself.

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SC
LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I wish the hon. member

would not try to tangle me up in social credit questions. There will be time for questions later on.

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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

The minister is making a good statement. He ought to be allowed to proceed.

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

The hon. member may question me later. That is the difficulty with which the government is faced, and perhaps the gov-

The War*-Finance-Mr. Ilsley

ernment's difficulties are not of as great importance as the effect a monetary scheme would have on the people.

I said something about the effect on agriculture, but I am not prepared fully to argue it at this time. In fact, if I were to argue all these points fully, my speech would be altogether too long. But in that connection I would refer the committee to what the Prime Minister said in his broadcast, because I believe at that time he put the case very well. This is what he said with respect to agriculture.

Nor is the position of the farmer any happier than that of the wage-earner. The present war is a war of machines. Because of the heavy demands of war on industry, the scarcity of manufactured goods is likely to be greater than the scarcity of farm products. The rise in prices will consequently be unequal, if prices are left to themselves. The things farmers have to buy tend to go up in price, more than the things they have to sell.

Persons in receipt of fixed incomes are in a pitiful condition in a period of rapid price rise or at the end of such a period. Widows and children who are in receipt of the benefits of insurance policies find that the money they have received is not worth anything like what was paid in by the insured. There is an enormous amount of life insurance carried in Canada, and all this would be badly written down by inflation. Other people have annuity contracts with the government and there are many other people with fixed incomes.

The pressure upon the government to relieve these groups becomes terrific. Lobbies of all kinds develop. I am not saying anything about the merits or justifiability of the various pressures that are being exerted upon the government at the present time, but these have resulted on account of the very moderate increase of 14-6 per cent in the price level since the fairly low level in August, 1939. What have we at the moment? We have thousands of representations on behalf of old age pensioners; we have representations on behalf of the dependents of the men in t'he forces; we have representations on behalf of civil servants who are not in the lower grades, which grades already receive a cost of living bonus; we have representations on behalf of superannuated civil servants; we have representations on behalf of those in receipt of disability pensions; we have representations on behalf of those in receipt of war veterans' allowances and we have representations from time to time on behalf of those who have entered into contracts with the government.

Let the price level rise be not 14-6 per cent, as is the case, but 50 per cent or 97 or 98 per cent as it was at the end of the last war, and hon. members will see that many groups are going to find themselves completely out of

line. They will find that their income does not go anywhere at all. The situation will be that many demands will be made upon the treasury. More and more of these groups will seek relief, but some will be left behind. I do not believe we could ever justify making payments out of the treasury to people cashing insurance policies. I do not believe we could justify making payments out of the treasury to persons who had purchased annuities and that kind of thing. A great many groups herei and there throughout the country would find their incomes written down by reason of that price level rise. This matter has been summed up so often that I do not know that it is necessary to go into it again. Mr. Baruch, a citizen of the United States who took a very prominent part in the last war, gave evidence before the banking and currency committee of the House of Representatives, and I should like to read two or three sentences from his submission. He said:

Except for human slaughter and maiming and all that goes with them, inflation is the most destructive of the consequences of war. It might double or more the cost of the war, it imposes the severest hardships on our people and, through inevitable deflation that follows, burdens the future with a constantly increasing debt and a long period of painful and bitter readjustment destroying the confidence of people in themselves and their government, leaving them open to all the old and new isms. Nor is inflation a danger which will hold back and wait for a formal declaration of a shooting war. With payrolls soaring and shortages developing, more money bidding for less goods, the danger of an inflationary price rise is imminent. If it is not taken firmly in hand in time, it may get beyond the possibility of control.

A little later on he said:

The second point I want to raise is that price control is essential if government salaries and appropriations are to have any meaning. What will happen to the teachers, war veterans, social security beneficiaries, policemen, firemen, all the hundreds of thousands of government employees, federal, state, county, and city, if prices are allowed to run wild? Will the federal, state, and city governments advance the wages of these people to meet increased costs of living? Or do they propose to leave them victims of fortuitous circumstances?

Again, with appropriations so much is voted for guns, tanks, and aeroplanes. Before they have been produced prices have jumped and to get the same number of tanks and guns and aeroplanes additional appropriations are needed. Many members of Congress, worried over the size of government expenditures, have been urging economies in non-defence expenditures. I say to them that no action could effect greater savings in the cost of government than to prevent inflation. Billions, 20 per cent or more of all appropriations, can be saved. There is no better form of economy than price control.

Along with those miseries and inequities one finds a certain proportion of the population

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who develop cunning in taking advantage of inflation. These are the inflation profiteers, they are the class of population that hedge against inflation. If they are successful, that is, if they get in at the right time and get out at the right time and make themselves rich out of inflation, they become hated, and the experience in other countries has been that eventually they are deprived of their gains by movements based upon mass indignation. In other words, the result is a state of affairs which divides the country; it is disruptive; it sets citizen against citizen; it destroys morale and unity. Labour, finding that prices are going up, becomes desperate to get more wages to meet the situation, and the result is a large labour turnover. War production is prejudiced and the war effort is injured.

These are some of the things which we have to think about when considering inflation. I am not as much concerned about the afterwar effect of deflation, although it is simply cruelty when that comes, as I am about the effect upon the war effort itself. I do not think any internal development could be more gratifying to the enemy than for this country to tear itself to pieces by inflation. We must believe these things, or we will not accept the somewhat unpalatable medicine of a price ceiling. But believing these things, we will accept a great deal before we will let this condition arise. That is the reason why with great earnestness and emphasis I am placing the possible consequences before the committee. I should like to come back to the Prime Minister's speech. Certain things were pictured very clearly, and this is what he said in one or two paragraphs:

We have heard much in recent weeks about rising prices. They have affected the budget of every family in Canada. We have heard and seen something of the dangers of inflation. But comparatively few of us, I imagine, understand those dangers fully, and what their effect may be upon our lives and our labours. By inflation we mean a rise in prices and costs brought about by abnormal conditions whereby our money is able to buy less of the things we need. Rising prices unless controlled will make it more costly and therefore more difficult to finance the war. Rising prices, unchecked, will spread confusion and uncertainty in industry and trade. They will hinder production .and the proper distribution of supplies. They will make the cost of living rise more rapidly than wages and salaries. The value of savings will be materially lessened. The result would be hardship to nearly every one, and hardship in very unequal measure.

As I say, there has to be price control. All countries have it in varying degrees, but all recognize the necessity of it, and this government would not be worthy of calling itself a government if it just let the situation drift, if it did not take prices in hand.

Indeed the only issue that has developed in countries somewhat similar to our own is as between two alternative policies. One is the policy of selective price control, otherwise known as piecemeal price fixing, and the other is the policy of the price ceiling. The leader of the opposition said: "Why don't we do as they do in England and the United States? Why don't we adopt the first method?"

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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

I do not

think I said that.

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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

He did not say it in a

way which was identifying himself with that method.

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November 6, 1941