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David Hayward's

Automotive History

This site has been established in order to publish various Working Papers for general study and comment on automotive history.

US AND BRITISH WARTIME AID

         CANADIAN ECONOMY

1: INTRODUCTION   1.0 COMMENT
Exmaple only
For the sake of clarification it should be mentioned that the first Lend-Lease programme started in February 1941, and this was enhanced by the "Victory Programme" of September and October 1941, which replaced the preliminary first aid and half-hearted approaches to the problem of supply [4]. Interceding between these two was the Presidential directive of 11 March 1941 which declared the U.K. eligible for "defence aid" [5] The "Victory Programme" was so named because by the summer of 1941, Anglo-American relations had reached a state of intimacy in which victory over Germany could be officially acknowledged as a joint concern of both nations. Various persons throughout 1940 and the first part of 1941 had urged the principle, but the issue came to a head in the late summer of 1941. [6]

The Dominion of Canada claimed fourth place amongst the United Nations as a producer of warlike stores, producing $9,000 million worth between September 1939 and June 1945. Before Pearl Harbour and Lend-Lease, Canada was "a much more attractive source of supply than the United States". [7] The official British attitude seems to be that as Canada was a co-belligerent from the beginning she could be expected to devote full energy into munitions programmes, and even if the products actually passed under the control of the U.K. they would be used for some use connected with the war in which the U.K. was engaged [8] This was with respect ignoring the efforts that Canada went to from 1935 onwards to produce materiel to U.K. requirements.

One fundamental advantage which supply from Canada had before Lend-Lease was that the Canadian dollar was virtually as "hard" as the U.S. currency. The Canadian Government was willing to accumulate Sterling from 1940 though at the beginning of 1941 and again at the end of 1942, the British Treasury had to insist on greater caution in the ordering of Canadian rather than U.S. munitions because the Mutual Aid project was not in full effect. This was resolved in the spring of 1943 with the Canadians putting war supply onto a solid non-monetary basis comparable with Lend-Lease [9]. This was provided for by The Canadian Mutual Aid Acts 1943-44, assented to on 20 May 1943 and amendments assented to on 23 June 1944.

Where the Canadians were to excel was in their production of vehicles, for not only the U.K. but world requirements. The production of tanks and aircraft did not make any significant impact on vehicle production. Nearly 600,000 soft-skin vehicles were produced in Canada, 70% of the U.K. output and more than twice as many as were supplied from the U.S., whose total output was only four times as much as the Canadians' [10]. No heavy trucks of 4 tons capacity, amphibious trucks or jeeps, or standard jeeps were built in Canada [11]: these were in fact supplied from the U.S.: Canadian jeep orders were supplied from Willys Corporation, railed to Kitchener, Ontario, and then prepared/knocked-down/shipped off by the Four-Wheel Drive Company's Canadian subsidiary.

Light armoured vehicles such as armoured cars, scout cars, and Bren gun carriers were however supplied from Canada [12], as well as armoured trucks. These were supplied to Canadian and U.K. forces, and in the reverse direction the Canadians received British-built armoured vehicles such as Daimlers and Humbers, which were paid for in Sterling.

The Wartime Industries Control Board was established by Order-in-Council in June 1940 to regulate production in private industry, and the various Crown Corporations that were to be formed, 28 in all actually being established. These included the motor industry and the various Crown Corporations formed to exploit the automotive industry's munitions capacity. British acceptance of Canadian manufactured goods was brought into line by the early appointment of British officers to inspection Boards.

1.1 1.1 THE OGDENSBURG AGREEMENT

In April 1940, Clarence Decatur Howe was appointed Minister of Munitions and Supply, taking over from Wallace R. Campbell, formerly head of Ford of Canada, who had headed the War Supply Board when formed in 1939. Campbell was then able to return to Fords to establish full production.

Post-Dunkirk, the Ministry of Supply in London placed huge orders to supply and re-equip the British Army, and in fact one-third of all contracts were awarded to Canada. This was excellent news for the Dominion, as it seemed to herald a massive industrial expansion. The Department of Munitions and Supply arguably pulled Canadian industry out of its depression.

However, there were various needs to liase with the U.S. Government: on the automotive side alone, Chrysler of Canada Limited was a wholly-owned subsidiary of the U.S. company, G.M. of Canada less so, and Ford of Canada even less. Of course, Ford and Opel in Germany were producing military vehicles for the Axis, and James David Mooney had, as a personal envoy of President Roosevelt, tried to broke peace before the Italians had entered the war in June 1940. Further, there was an urgent need to obtain vehicles and other supplies from the U.S. to satisfy Canadian and Allied demands.

The Prime Minister McKenzie-King felt that there was a need to have an immediate consultation with President Roosevelt. Meetings between the two leaders were held out of Washington as the U.S.A. was still neutral. In August 1940, the Ogdensburg Agreement was signed in Ogdensburg, New York, recognising joint Canadian and U.S. responsibility for the defence of North America. The permanent Joint Board of Defence was established as a consequence, which started the trend for independent self defence from the U.K.. This was not a commercial agreement, but it was a start: there was at the time a powerful isolationist movement in the U.S. that campaigned for the country to stay out of any "European war", and also feelings that the British were bound to lose, that the British Empire would be dismantled at last, with a consequent end to imperialism.




1.2 THE HYDE PARK AGREEMENT

Despite the increases in Canadian production, many parts had to be purchased from the United States. By 1941, the increase in imported parts had created a sizeable balance of payments problem for Canada, in favour of the U.S. President Roosevelt had already persuaded Congress to pass the "Lend-Lease" legislation, whereby the United Kingdom would be sold, lent, leased or gifted vital materiel which was an incredible turn of events. However, all British assets in the U.S. were frozen as a result, and the UK had no means of paying for any Canadian war supplies or food! It was clear that Canada would have to agree a similar deal, but this would require the liquidation of Canadian assets in the U.S. and this would have a drastic effect on the Canadian economy.

In April 1941, the then Prime Minister McKenzie-King again arranged a direct meeting with President Roosevelt at the President's Hyde Park estate. King put it bluntly that if Canada was forced to liquidate its assets, this would directly result in widespread ant-American feelings. The President was of course acutely aware that many Americans thought that Britain was going to lose the war, and that the U.S. should stay firmly neutral. The answer suggested by King was that the U.S. should purchase Canadian goods equal to Canada's needs, on a reciprocal basis. Roosevelt agreed, and on the 20 April 1941, THE HYDE PARK AGREEMENT was signed which provided a virtual barter system in North America. A new Crown Corporation, War Supplies Limited then sold C$100 million-worth of goods to the U.S. in its first three months of existence under a Canadian businessman, E.P. Taylor. This resolved the trade deficit with the U.S.!

1.3 FINANCIAL AID TO THE UNITED KINGDOM

After the Hyde park Agreement, trade relations with the United States had been regularised. However, the U.K. had by then a massive dollar debt with Canada. In July 1941, Clarence Decatur Howe, appointed Minister of Munitions and Supply in April 1940, argued to the Canadian Cabinet that the U.K. ought to be assisted by radical financial steps. He argued that the Canadian population was much more likely to be generous in a time of emergency than after the war. Therefore, the end of 1941 established an interest-free loan of C $700 million. This was followed in January 1942 by a C$1,000 million worth of supplies as an outright gift.

In an ideal situation, these measures should have been sufficient for Britain's needs. However, by 1943 the U.K. was totally unable to purchase supplies. Through Canada's Mutual Aid Board, a further C$1.2 billion worth of equipment was supplied without charge. This was provided for by The Canadian Mutual Aid Acts [The War Appropriation (United Nations Mutual Aid) Act 1943 as amended] 1943-44, and the Mutual Aid Agreement between the Governments of Canada and the United Kingdom, 1944, which in fact allowed supply to any United Nation country. The 1943 Act which received assent on 20 May 1943 allowed for C$1,000 million to be raised under The Consolidated Revenue and Audit Act 1931 by the issue and sale or pledge of securities, etc., and the funds were then to be paid out of the Consolidated revenue Fund. The Canadian Mutual Aid Board which administered the supply of materiel consisted of the Minister of Munitions and Supply, the Minister of National Defence, the Minister of Finance, the Minister of Agriculture, and the Minister of Justice acting as a committee of the Privy Council for Canada. The amending Act, The War Appropriation (United Nations Mutual Aid) Act 1944, which received assent on 23 June 1944, included U.N.R.R.A., the United Nations Relief and Rehabilitation Administration as a body to receive supplies. U.N.R.R.A. received large donations of military vehicles, some new, as a gift from Canada. The Mutual Aid Board was to consist of the same Ministers as before, plus the Minister of Trade and Commerce. The Act allowed an extra C$800,000 to be allocated out of the Consolidated Revenue Fund with powers to raise the money as before. The Mutual Aid Agreement between Canada and the U.K. was signed in Ottawa on 11 February 1944, and which provided for Canadian supplies to the U.K. under the 1943 Act on various conditions, including that materiel supplied to the U.K. would not be delivered to anyone else without Canadian consent, and after the war ended, war supplies delivered under the Agreement to the U.K. would revert to Canadian ownership except supplies intended for relief purposes [i.e. U.N.R.R.A.]. Note that aid furnished by the U.K. to Canada and to Canadian forces abroad was not treated as reciprocal aid formally [total C$1,580 million paid by Canada for its forces abroad].

The result by the war's end was that the Canadian populace per head had provided five times the amount of aid given to the allies by the U.S. [13]74

1.4 COMPARISON WITH THE UNITED STATES

The United States supplied US$21 billion worth of munitions to the British Empire/Commonwealth from U.S. production during the war, though less than 1/10th became available before the end of 1941. Further, during the war, the United States provided merely 10½ % of the dollar value of its munitions supplies compared with 21% for the whole war period. [14]

The first substantial orders from the United States were made through the British Purchasing Commission in Washington, headed by Arthur B. Purvis [15] This was for 450 military aircraft as the Air Ministry was alone in being free or relatively so, from the crippling restrictions imposed on dollar expenditure in the first nine months of the war. Purchases of aircraft and associated stores accounted for over 60% of all cash commitments incurred by the British Government up to March 1941 in respect of warlike stores [16].

Before the February 1941 Lend-Lease agreement, a very large part of U.S. munitions supply in 1940, and extending into the following year, was of occasional bulk reinforcements prompted by emergencies. The first of these was, as can imagined, Dunkirk. The response to the calamitous loss of equipment was the shipment of 750,000 rifles, 80,000 machine guns, and nearly 900 field artillery pieces, along with other much needed war material [17]. What was not mentioned was the supply of motor trucks from U.S. manufacturers, including General Motors and Ford, and also White Corporation whose heavy tractor units were used to transport aircraft and tanks. All U.S. trucks were supplied through their respective concessionaires or importers at this stage.

Reference is made below to "Reciprocal Aid". This was provided for by the Reciprocal Aid Agreement between the United Kingdom and the United States of 3 September 1942, which intended to reduce the need of each Government for the currency of each other. Total British reciprocal aid to the U.S. throughout the war to 1 September 1945 was estimated at £1,241,402,000, or just over US$5,000 million. In addition, reciprocal aid estimated at £519 million or US$2,092 million was given to twelve foreign countries. This included the million British sparking plugs supplied to the U.S. bomber fleet [which must have included AC-Sphinx Sparking Plug Company Limited]. The British White Paper on Reciprocal Aid of November 1943 gave a total of US$6 million spent by the U.K. on supplies of all kinds from the U.S. The total up to the termination of Lend-Lease 1 September 1945 was at least US$7 million. At the time of the White Paper, cash purchases were running at over $20 million per month. The larger part of this total expenditure was spent on munitions and machine tools pre-Pearl Harbour. The dollar value of all exports to the British Empire for the first three months of 1941 was nearly 2½ times the value for the first three months of 1939, and over half again higher than the first three months of 1940.

British Government armed forces expenditure [i.e. excluding food and most raw materials] in the U.S. before Lend-Lease amounted to US$3,200 million. Of this, US$50 million was spent on motor vehicles and $150 million on tanks. [18]

1.5 CANADIAN LEND-LEASE ORDERS

At the outset of war, Canada produced munitions mainly for the United Kingdom "market" since the British Government and its agencies determined to a large extent what armaments should be produced, how much and when. The Hyde Park Agreement opened up alternative markets as it enabled Lend-Lease contracts to be placed in Canada. This was the "U.S. programme in Canada" from the U.S. standpoint, although production was primarily for the U.K. This production brought in much-needed U.S. dollars, and gave concern in London at the possibility that the U.S. required more Canadian production to be supplied to China and away from the U.K.: Chinese supplies accounted for 10% of Canadian production in the latter part of 1941.However, there were no grounds for concern as the U.K. could count on its supply programmes being accepted and implemented promptly [19].

.
2: CANADA UNDER EXCHANGE CONTROLS (1939-51)

2.0 WORLD WAR I
The Canadian Government's economic reaction to the outbreak of war was based on experience gained from the last major conflict. Operation of the gold standard from 1 August 1854 when the Currency Act was proclaimed, until the outbreak of World War I in 1914, the Province of Canada, and subsequently the Dominion of Canada, was continuously on a gold standard. Under this standard, the value of the Canadian dollar was fixed in terms of gold. It was also valued at par with the U.S. dollar, with a British sovereign valued at C$4.8666. With the outbreak of war in 1914, the age of the gold standard ended as all major countries suspended the convertibility of domestic bank notes into gold and the free movement of gold between countries However, in the U.K. private exports and imports of gold remained legal in theory, saving the effect of government regulations that discouraged buying and selling in gold and bullion dealers refusing to permit gold exports on patriotic grounds. [20]

In Canada, convertibility was officially suspended.: as tensions mounted in the days immediately prior to the declaration of war on 4 August 1914, there were heavy withdrawals of gold from banks. In an "atmosphere of incipient financial panic", there were concerns about the possibility of bank runs. [21] On 3 August 1914, an Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender. This allowed the banks to meet their depositor demands with their own bank notes rather than with dominion notes or gold. A second Order-in-Council, issued on 10 August 1914, suspended the redemption of dominion notes into gold. This and the previous Order-in-Council were subsequently converted into legislation as "An Act to Conserve the Commercial and Financial Interests of Canada" (the Finance Act), which received royal assent on 22 August 1914. The Finance Act gave the government the power to act as a lender of last resort to the banking system--one of the powers of a modern central bank. It also provided a means for the government (Treasury Board) to set the Advance Rate, the rate at which it would make loans to the chartered banks. Advances under the Finance Act were made at the request of banks. The government could not freely adjust bank reserves in order to expand or contract the monetary base.

Throughout the war, the Advance Rate remained at 5%, although a special 3½ % rate was established in 1917 under which the government discounted British treasury bills held by the chartered banks. This facility was designed to assist the British government's war effort. It was complemented by a special $50 million issue of dominion notes backed by British treasury bills to help finance British purchases of war materials in Canada. [22] The government also increased the fiduciary issue of dominion notes (i.e., notes not backed by gold) in 1915 under an amendment to the Dominion Notes Act.

Despite the suspension of gold convertibility in August 1914, the Canadian dollar traded in a very narrow range close to parity with its U.S. counterpart throughout the war years. In 1918, however, the Canadian dollar began to weaken, and its decline accelerated during the two-year period following the end of hostilities, until it reached a low of roughly U.S.$0.84 in 1920: caused by excessive monetary expansion during the war. [23]

However, during the period of the Great War, exchange controls were not imposed. In 1914, Canada's principal foreign creditor was the United Kingdom, with the bulk of British claims on Canada in the form of direct investment or denominated in Sterling [presumably including railway and shipping stock]. British holdings of U.S. dollars were also substantial at the outbreak of World War I. Consequently, the British authorities were able to pay for their own U.S. imports, maintain a stable and convertible currency, and provide U.S. dollars to Canada in settlement of Canada's trade surplus with the United Kingdom. As a consequence, the British Government was able to place orders for U.S. military vehicles, tractors, cars, electrical equipment, which could not be satisfied by domestic production, and in the case of four-wheel drive trucks, there was no equivalent product until licence manufacture in England began [24].

2.1 EVENTS TO 1941

The Exchange Fund Act received royal assent on 5 July 1935. The primary purpose of the act was to provide a fund that could be used to "aid in the control and protection of the external value of the Canadian monetary unit" [25]. However, although the Exchange Fund Act was passed in 1935, the section of the act dealing with the use of the fund to protect the value of the Canadian dollar was not put into effect until 15 September 1939, following Canada's entry into World War II. In any event, an Exchange Fund Account was not required to stabilise the Canadian dollar during the mid-1930s. With the currency trading in a relatively narrow range around parity with its U.S. counterpart, little intervention by the Bank of Canada was required. The currency's fluctuations were limited by substantial current account surpluses on the one hand and the repayment of foreign borrowings on the other. [26]

By late 1938, as the international political climate deteriorated, the Canadian dollar began to slip, falling to a small discount of roughly 1 % against the U.S. dollar. The decline was modest, however, compared with that of £Sterling, which fell by roughly 6% in the second half of 1938, reflecting a considerable shift of funds out of the United Kingdom [27]; the average Sterling exchange rate was U.S.$4.89 and C$4.92, compared with U.S.$4.971 in 1936, and U.S.$4.944 in 1936 [28]. After several months of relative stability, the Canadian dollar came under renewed, and this time significant, pressure in the last days of August 1939, as world tensions increased and funds moved to the safety of the United States. The Canadian dollar fell roughly 6 % compared with the U.S. dollar in the two weeks prior to Canada's declaration of war with Germany on 10 September 1939, and by another 3% by the time the Government imposed foreign exchange controls in mid-September. [29] However, Sterling fell even more sharply, declining from U.S.$4.86 to U.S.$4.06, a depreciation of roughly 14 %, before the imposition of exchange controls in the United Kingdom in early September, which resulted in an average rate of U.S.$4.46 [30]

Exchange controls were introduced in Canada through an Order-in-Council passed on 15 September 1939 and took effect the following day, under the authority of the War Measures Act without a vote by Parliament. The Foreign Exchange Control Order established a legal framework for the control of foreign exchange transactions, and the Foreign Exchange Control Board (F.E.C.B) began operations on 16 September though preparations for the imposition of exchange controls in the event of war had begun in secret as early as August 1938 [31] The Exchange Fund Account was activated at the same time to hold Canada's gold and foreign exchange reserves. The Board was responsible to the minister of finance, and its chairman was the Governor of the Bank of Canada with day-to-day operations of the F.E.C.B. carried out mainly by Bank of Canada staff.

The Foreign Exchange Control Order authorised the F.E.C.B. to fix, subject to ministerial approval, the exchange rate of the Canadian dollar against the U.S. dollar and £Sterling. Accordingly, the F.E.C.B. fixed the Canadian dollar value of the U.S. dollar at C$1.10 or U.S.$0.9091 buying rate and C$1.11 or U.S.$0.9009 selling rate. The £Sterling was fixed at C$4.43 buying, and C$4.47 selling. These rates were roughly consistent with market exchange rates immediately prior to the imposition of controls. Currency rates on futures contracts of up to 90 days were also fixed by the F.E.C.B. These exchange rates were maintained for the duration of the war. The official U.S.$ to £Sterling rate was fixed at U.S.$4.03 from 1940 to 1948 [32]

To conserve Canada's foreign exchange and effectively support the value of the Canadian dollar, the F.E.C.B. introduced extensive controls. These controls allowed the Board to regulate both current and capital account transactions, although most current account transactions, other than travel, were treated fairly leniently. The Canadian government placed controls on the importation of goods deemed to be non-essential. Other bodies administered such import controls. Permits were required for all payments by residents to non-residents for imports of goods and services. Permits were also required for the purchase of foreign currencies and foreign securities, the export of funds by travellers, and to change one's status from resident to non-resident. Residents were also required to sell all foreign exchange receipts to an authorised dealer. Interbank trading in Canadian dollars ceased.

On 30 April 1940, the Foreign Exchange Acquisition Order stiffened the controls even further. Canadian residents, including the Bank of Canada, were now required to sell (with minor exceptions) all the foreign exchange they owned to the F.E.C.B. The imposition of exchange controls by the Canadian authorities reflected a number of concerns [33]. First, even though it was expected that Canadian exports to the United Kingdom would increase, there was a concern that the Canadian military build-up would lead to a significant rise in imports from the United States, which turned out to be true. Second, under the U.S. Neutrality Acts, loans to "belligerent" countries were forbidden. Hence, U.S. imports had to be paid for in cash, i.e., U.S. dollars or gold. Moreover, given British exchange controls, an increase in Sterling assets arising from net Canadian exports to the Sterling area could not be converted into U.S. dollars. Finally, there was a concern that Canadians might seek to place funds in a non-belligerent country and that U.S. residents, who held considerable Canadian assets, might seek to repatriate their holdings.

It is interesting to note that while all foreign currency transactions were subject to exchange controls, in practice the controls centred on transactions involving U.S. dollars. Although permits were required for Sterling transactions, there were no restrictions [34]. Moreover, Canadian residents were not required to sell Sterling receipts to the F.E.C.B. [35] This reflected the build-up of Sterling balances held by the F.E.C.B., which could not be converted into U.S. dollars. Efforts to reduce these sterling balances included the interest-free loans to the U.K. and the repurchase of Government of Canada bonds issued in Sterling, including those of the Canadian National Railway.

In the Great War, the U.K. was Canada's greatest creditor. In the second conflict, the United States had become Canada's most important source of foreign capital, and there was concern that neutral U.S. residents would not wish to hold the securities of a belligerent country. British holdings of U.S. dollars were also much diminished pre-Lend-Lease [although arguably Lend-Lease aggravated the U.S. dollar shortage]. Therefore, Canada could not expect the United Kingdom to provide U.S. dollars in exchange for surplus Sterling balances, as it did in 1914. To make matters worse, the U.K. had imposed Exchange Control at the outbreak of war in order to regulate the flow of Sterling [36].

The Canadian Government also tried to restrict the demand for passenger cars, to allow priority in production for the Government, and also to restrict the demand for imported "Cash-on-delivery"] cars that had to be imported from across the border as there was no Canadian production of certain models. In the War Budget of 24 June 1940, the Minister of Finance introduced a heavy schedule of excise duties that ranged from 20 to 90 %! However, even these hefty duties did not stifle demand and imports continued unabated. To exacerbate this scenario, exports of vehicles from Canada to Empire/Commonwealth countries in the Sterling area were curtailed and replaced by U.S. exports in U.S. ships, which had to be paid for in U.S. dollars. This in turn caused significant difficulties for Australia and New Zealand who also had dollar shortages.

2.2 THE SITUATION IMPROVES

By late 1944, pressure on Canada's foreign exchange reserves had eased dramatically. The Hyde Park Agreement of April 1941 permitted Canada and the United States to specialise in the production of war material. Canada concentrated on the production of certain types of munitions, aluminium, and ships required by the United States. [37] This was followed by the entry of the United States into the war in December 1941, and major U.S. infrastructure projects (such as the building of military bases and the construction of the Alaska Highway), which together contributed to a rebuilding of Canada's foreign exchange reserves. There were also significant capital inflows into Canada, partly from Canadian residents repatriating funds invested in U.S. securities, and also from U.S. residents buying Canadian Victory Bonds. U.S. direct investment in Canada also increased.

The rebuilding of reserves allowed a slight easing of exchange controls in 1944 to facilitate travel to the United States and to allow Canadian firms to extend their foreign business activities. By the end of 1945, Canada's holdings of gold and U.S. dollars had increased to U.S.$1,508 million from only U.S.$187.6 million at the end of 1941. With expectations of continued capital inflows, the Canadian dollar was revalued upwards by roughly 9% against both the U.S. dollar and the £ Sterling on 5 July 1946. The new rates were: buying C$1.000, selling C$1.005 (U.S.$0.9950) for the U.S. dollar, and C$4.02 buying and C$4.04 selling for the £ Sterling.

2.3 THE UNOFFICIAL EXCHANGE MARKET

Shortly after the imposition of exchange controls in 1939 and the official fixing of the Canadian dollar's value in terms of the U.S. dollar by the F.E.C.B., an unofficial market for Canadian dollars developed in New York that persisted until the Canadian dollar was floated at the end of September 1950. This was a legal market involving transactions in Canadian dollars between non-residents of Canada. Residents of Canada were prohibited from acquiring foreign exchange through the unofficial market. Similarly, no resident of Canada was ever authorised to convert foreign exchange into Canadian dollars through the unofficial market. In 1939 and 1940, the $C was equivalent to 99 U.S. Cents until war broke out, when it declined to 87 Cents, the official rate being in 1940 90.090 U.S. Cents to C$1.00, though the free rate was anywhere from 84 to 87 Cents.

The source of "inconvertible" Canadian dollars consisted of Canadian dollar bank balances held by non-residents when exchange controls were introduced in 1939, sales by U.S. residents of certain types of assets (such as land and buildings), and the proceeds of maturing Canadian dollar securities paid to non-residents. Canadian dollars purchased in the unofficial market could be used only in a very circumscribed manner. For example, they could not be used to purchase Canadian goods and services. In this regard, the purpose of exchange controls was not just to conserve available foreign exchange but also to maximise the receipt of foreign exchange. U.S. residents wishing to buy Canadian securities or land/buildings were, however, permitted to use Canadian dollars obtained in the unofficial market, as could travellers to Canada.

The unofficial market for Canadian dollars ended with the floating of the Canadian dollar. Throughout most of its existence, the inconvertible Canadian dollar traded at a sizeable discount compared with its official counterpart. The spread between the two rates mirrored the pressures on the Canadian economy, widening to more than 10 % during the darkest months of 1940 and narrowing as the war progressed and Canadian prospects improved. By 1945, the discount was temporarily eliminated.

During the 1940s, there was an active debate over whether the unofficial rate was the "true" value of the Canadian dollar. The Bank of Canada maintained that given the "limited use" of inconvertible Canadian dollars and the small size of the market, prices were not necessarily an accurate reflection of sentiment towards the Canadian dollar [38]: the Bank of Canada estimated that, on average, the unofficial market accounted for only 3% of Canada's international transactions. [39] Many economists, including then-assistant professor of economics, Milton Friedman, disputed this. Friedman argued that there was no particular reason why a small market should necessarily lead to a distorted price [40].

3: WARTIME SUPPLY AND SETTLEMENT

3.0 PRE-WAR ORDERS

Although the first British overtures to Canadian manufacturers for the supply of munitions dates back to 1935, it was only in June 1940, post-Dunkirk, that there was a complete revolution in the attitude of both Canadian and British Governments towards Canadian munitions production. There were several reasons for the slow start in supply. The first of these was doubts pre-war by the Canadian Government and the general lack of funds at the disposal of the supply departments in London, particularly the War Office for either production or even "educational orders". The total orders available were in fact insufficient to build up capacity in the U.K. let alone put orders into other Empire countries. After war broke out, the shortage of dollars and the misguided belief that Canadian production could not be started in time to be of real value compounded the lack of readiness.

The effect of the failure, arguably mainly by the War Office and then the Ministry of Supply, was that Canadian manufacturers pre-war, and then the Government, were continually urging London to make fuller use of Canada's resources. Conversely, Whitehall was constrained to adopt an attitude of reserve and caution and the orders that they did give were often having the character of concessions. The British Government had significant problems of expanding domestic production that left little time to consider any early development of production in Canada.

3.1 CANADIAN ORDERS FROM THE U.K.

The Canadian Government had responded to the declaration of war on Germany with typical efficiency: the Dominion of Canada declared war on Germany by Act of Parliament on 9 September 1939. However, war preparations had already begun: William Lyon Mackenzie-King, the Canadian Prime Minister had ordered the mobilisation of the Canadian Armed Forces on 1 September in line with the U.K. Approaches to Prime Minister Chamberlain as to what was required of Canada elicited a response from the then Secretary of the Dominions, Anthony Eden, that an expeditionary force would be sent as in 1914. The First Canadian Division of 23,000 men was raised under the command of Major-General Andrew McNaughton by 17 October, and arrived in England before the end of the year though with very little equipment of its own. As a result, there was a considerable economic benefit to the British Government: the Canadian armed forces had to be supplied out of U.K. production which then generated dollars which were used to pay for the equipping. The Canadian Government had offered to replace the British-supplied equipment with Canadian production; however the War Office in London advised the representatives of the Canadian War Supply Board in London that "the crux of the whole situation is financial….when we buy from (the British) such supplies as manufactured articles which are made in volume in the United Kingdom they do not want those supplies replaced in kind, but would prefer money in order to purchase supplies which were more urgently needed such as foodstuffs, raw materials, etc.".

In March 1939, the War Office had suggested to the then Department of National Defence in Ottawa that Canada should build some Bren gun carriers, tracked armoured fast vehicles, for Britain. These were later known as the "Universal Carrier" or "Windsor Carrier", bui1t by Ford Motors Company of Canada at their Windsor, Ontario Plant. An undertaking was given in June that if a reasonable price could be secured, then 100 carriers might be ordered to start production, but in December the Ministry of Supply was refused by the Treasury the sum of C$500,000 because there was no lack of capacity at home, there was a vast expenditure of Canadian dollars on the Empire Air Training Scheme, and the location of the Canadian Expeditionary Force cancelled the previous undertaking! Any Carriers made in Canada should be at their expense and supplied to the Canadian Expeditionary Force! This was hardly diplomatic, and when in March 1940 a Canadian mission visiting London pressed for the reinstatement of the original order plus an extension to 200 vehicles, the Ministry of Supply said that they had no requirement for them! The Dominions Office then warned that cancellation would be rather unfortunate politically, and the order was then reinstated. This volte face was to prove to be the start of massive orders in due course! In addition to the Universal Carriers, at the outbreak of war, 300 Valentine Tanks were being considered to be produced in Canada to British orders, but in March 1940 the Ministry of Supply concluded that the Canadian companies were not competent to build tanks on the advice of a visiting "expert" and the contract remained in abeyance until June 1940. However, the Canadians were adamant that they could build tanks and other armoured vehicles, and they proved themselves later as having considerable competence indeed! [41]

The build-up of military vehicle supplies was arguably the exception to the slow development of production. By 31 December 1940, of 2,279 Universal carriers ordered or under negotiation, 1,000 were on U.K. account and 1,279 on Canadian account. However, of 95,848 vehicles, 72,434 were on U.K. account and 23,414 on Canadian account [42]. However, between 1940 and 1942, 11,170 were produced for the Empire/Commonwealth, 3,505 for home defence, and 8,205 for the U.K.; U.K. production was 24,037 [43]. In practice, though, the first batch of Canadian Bren gun carriers was tested in England in February 1941 and Canadian-built Universal carriers began to arrive before the end of 1941. Otherwise, first call on Canadian production was for the equipping of Canadian troops, which meant that the British Army had to wait until well into 1942 before receiving large-scale Canadian production. This was however not unwelcome to the British Government [44]: this would have delayed the requirement for payment in dollars that were subject to such a shortage. In the meantime, assembly of Canadian vehicles was accounted for since, for instance, each truck was costed at C$50. Although virtually nominal rents were charged for the Southampton and Slough premises, each Plant and all the other "satellite" assembly operations with the exception of the Bordon Camp No1. C.E.A.U., employed civilians: male and female, and these were paid locally with commensurate benefits to the local communities.

There was a further major exception to the delayed supply of munitions to the U.K.: mechanical transport. Production of military vehicles rose from 25,000 in 1940 to 190,000 in 1942, with considerable numbers being supplied directly to North Africa for the Imperial forces [45].

U.K. provision of supplies and services in exchange by the U.K. to Canadian forces abroad were: C$20 million in 1940, then $40 million, $85 million, $430 million, and C$1,005 million in 1944: total $C1,580 million [46].

3.2 ORDERS WIND-DOWN

The summer of 1942 saw the phase of expansion virtually complete both in the U.K. and Canada. Munitions plants were at or near full capacity in the Dominion, and there was little scope for any more improvement. This then raised queries in Canada as to what was required next. The British Government was faced with manpower shortages, which the Ministry of Production felt, should be alleviated by transferring the burden of production to Canada if possible. In September 1942 the Ministry asked the War Cabinet to confirm that existing Canadian capacity should be kept fully employed and further orders placed in the Dominion wherever possible. Of C$1,500 million worth of warlike stores ordered on behalf of British Government departments for delivery between September 1942 and December 1943, nearly C$1,300 consisted of Ministry of Supply stores. However, demand for such stores was beginning to decline as Army arms and ammunition approached saturation point. In the autumn of 1942, a review of manpower in London established a severe cut in War office scales of equipment.

The Canadians were thus presented with a difficult scenario: they were producing Army equipment, which would shortly no longer be required by the U.K. There was still demand though for A.F.V.'s [Armoured Fighting Vehicles] and rifles and Bren guns, as well as mechanical transport, the demand for the latter being immense and still growing. The reduction in Canadian output rates early in 1943 were intended to relieve the burden on the U.K. It was perceived in the Dominion that there was little prospect of fresh or continuation orders beyond 1943 for then-current production.

The Ministry of Supply and representatives of the Canadian Department of Munitions and Supply had discussions in London as to how to deal with this problem. London was conscious of the political repercussions of abrupt cessation of production, which fore example caused the closure of a Hamilton, Ontario which built Bofors guns and employed 5,000 workers: this closed in June 1943. This was in fact an advance taster of what would happen with Crown companies set up to build munitions. The Canadians had to face up to the fact that demand for most types of munitions was not unlimited and that production rates would have to change. The solution was to switch Canadian production to stores still in demand, accomplished by increase in aircraft production, increases in merchant ships, maintenance of carrier production as well as rifles and Bren guns, and new types of weapon [47].

3.3. DISPOSALS AND SETTLEMENTS

3.3.1: THE U.S.A.

The one exception to the slackening of orders was that for vehicles. Evidence from actual vehicles has shown that although they were assembled well into 1945, and in fact overseas assembly continued for post-war purposes into 1946, these were 1944 orders. However, these continued to be supplied to the United Nations forces and then post-war Canada and the United Nations organisation U.N.R.R.A. gifted new and refurbished vehicles to various countries for their own forces or for infrastructure repairs, It is not know whether the U.N. paid the Canadian Government for these vehicles or not.

At the end of the war in Europe, the U.K. had liabilities of £3,600 million, of which £2,723 million was owed in the sterling area. In order to resolve the chronic financial problems that the U.K. had by the end of 1945, discussions took place between the two Governments from 11 September to 5 December 1945. Truman and Attlee announced the first post-war settlement agreement after negotiations had been completed. A joint statement appended to the "Financial Agreement between The Governments of the United States and the United Kingdom", 6 December 1945 effected the "Settlement for Lend-Lease, Reciprocal Aid, Surplus War Property and Claims" [48]. The settlement was worked out in detail in "Specific Agreements" concluded in March 1946 [49]. With reference to the Mutual Aid Agreement [i.e. the Master Lend-Lease Agreement of 23 February 1942], the agreement envisaged final settlement of Lend-Lease and Reciprocal Aid. No further benefits would be sought as consideration for Lend-Lease or Reciprocal Aid. The net sum due from the U.K. to the U.S. in settlement of the two programs, for the acquisition of surplus property, and the U.S. interest in installations in the U.K. and for the settlement of claims should be $650 million subject to accounting adjustment as provided. All new transactions after 1 December 1945 were to be paid for by cash.

However, although the U.S. did not intend to exercise generally its rights, the agreement allowed the U.S. the right of recapture of any Lend-Lease articles held by U.K. armed forces. Disposals for military use to non-U.K. forces of Lend-Lease articles held by the U.K. and disposals for civilian use other than in the U.K. and colonial dependencies of such lend-Lease articles would be made only with the consent of the U.S. Government, and any net proceeds were to be paid to the U.S. government. The U.K. Government agreed that except to a very limited extent it would not release for civilian use in, or export from, the U.K. and colonial dependencies, Lend-Lease articles held by the U.K. armed forces. The U.K. Government agreed to use best endeavours to prevent the export to the U.S. of any surplus property transferred in accordance with this understanding.

The U.K. Government agreed to transfer from time to time prior to 31 December 1951, when requested by the U.S. Government, cash in pounds sterling the dollar value not to exceed $50 million at prevailing exchange rates to be credited against the dollar payments due to the U.S. Government as principal under the agreement. The sterling was to be used to acquire land or acquire or construct buildings in the U.K. and colonial dependencies for the use of the U.S. Government and for the carrying out of educational programmes as agreed.

The agreement did not affect settlements between the U.S. and Australia, New Zealand, South Africa and India, but there was no reference to Canada.

However, what would prove to be a massive millstone around the neck of the U.K. was the requirement to fund repayments of an essential loan from the U.S. Only a moderate loan was [pre-Marshall Plan] judged to be acceptable to Congress, and despite the best efforts of the British negotiators, interest had to be paid on the loan. Congress finally voted in the package, and Truman signed on 15 July 1946. The arrangement consisted of two elements: a loan or "line of credit" to the U.K. fixed at US$3,750 million and secondly the payment by the U.K. of US$650 million in complete and final settlement of the financial claims of each Government against each other arising out of the conduct of the war. The $650 million was a liability to be discharged by the U.K. on the same terms as the loan, which could be drawn on up to 31 December 1951 at which time interest would become due on the total sum of US$4,400 at 2%. Of that $650 million, $60 million was attributed to the "sale" of U.S. property in the U.K., and $472 million as payment in final settlement for stocks of lend-lease goods of civilian types held by the U.K. on V.J. Day.

The general lend-lease settlement referred to above was then the subject of nine "Specific Agreements" negotiated between December 1945 and March 1946, and signed on 27 March 1946. Of those nine, the third was for "Civilian Holdings" and the fourth "Military Holdings". It appears that the U.S. Government recaptured all of their military aircraft that they wanted, and as a compromise, 672 Dakota aircraft and 43 other aircraft were deemed capable of civilian use and regarded as being covered by the 6 December 1945 total. An equal number of Dakotas were then temporarily leased as well. The net result of this was that after the U.S. and U.N.R.R.A. had picked over all of the U.S. Lend-Lease stores, what was left was able to be transferred to the U.K. Government title, and this included "civilian" vehicles which were used as ambulances, relief, canteens, etc., and military vehicles left. The Ministry of Supply then gained title to vehicles which were disposed of under the S.M.M.T. scheme or by tender.

Total U.S. Lend-Lease aid to the U.K. was in the order of US$27,000 million, and British reciprocal aid to the U.S. US$6,000 million, equivalent to US$20,000 million from a country the size of the U.S. The settlements then wrote off some US$16,000 million or over US$20,0000 million of Lend-Lease credit. [50] However, the Dollar Debt and shortage of currency to repay the agreed indebtedness would prove to be a massive burden on every single member of the population in the U.K.

The United States Treasury, Department of Commerce and War Assets Administration represented the U.S. Government in the disposal of all U.S. assets, either domestic or overseas and recaptured. Military truck production ended under wartime contracts in the U.S. in 1946 with 2,019 produced. U.S. disposals at 50% of the acquisition cost netted the U.S. Government $111,461,935 to 1 January 1947, with disposals of vehicles starting in 1944. By 1 March 1947 disposal had been made of 269,678 Trucks, 32,257 Jeeps, 29,084 Passenger Cars, 331,019 Power Units, and 55.406 Trailers! [51]




3.3.2: CANADA

From 1943, the Canadian War Industries Control Board in Ottawa supervised the disposal of surplus vehicles through it appears in the case of Canadian disposals, to appointed Canadian dealers at fixed prices. [52] However, after the war ended a formal resolution of who owned what and who owed whom had to be resolved in order for remaining Canadian assets in Canada and those in the U.K. that were to be disposed of [the Ministry of Supply being anxious to sell at the best prices anything and everything that could realise funds]. The War Claims Settlement between the United Kingdom and Canada, which was concluded on 6 March 1936 following negotiations at Ottawa between the two Governments. The Government of the U.K. agreed to pay the sum of C$150 million to the Government of Canada, and thereupon with exceptions listed, the two Governments agreed to cancel all claims against each other that arose on or after 3 September 1939. The agreement amongst other things included without limitation:
a) a) All claims arising out of the operations of the Inspection Board of the U.K. and Canada and the period of the settlement was extended to 31 March 1946 when the Government of Canada took over all the assets and liabilities of the Board as of that date;
b) b) All claims of the Government of the U.K. arising out of the operation by the Department of Munitions and Supply of Canada of joint production projects and all claims relating to the period before 1 March 1946 arising from past or future re-negotiation of contracts or the retroactive adjustment of prices paid by or charged to the Government of the U.K. in Canada;
c) c) All claims between the two Governments arising from the sharing of profits and losses before 1 March 1946 under contracts or arrangements made before that date and where projects covered by profit or loss sharing agreements continued in operation beyond that date, shares of profits or losses accruing on and after that date were not affected by the Agreement except in the case of the Inspection Board;
d) d) All claims between the two Governments arising from the disposal in the United Kingdom of surplus war assets of the Government of Canada or from the disposal in Canada of surplus U.K. war assets, provided that nothing was to prejudice the right of either Government to remove any of its surplus war assets from the other country, either for its own use or transfer to others. Therefore, any Canadian-owned vehicles, generators, trailers, etc. left in the U.K. and not reclaimed by the Canadian Government, were able to be disposed of by the British Government, acting presumably through the Ministry of Supply. [53]

The Canadian Government therefore provided the total financial aid to the U.K., freely and without charge:
1942 Gift C$1,000 million
1943-45 Mutual Aid C$2,043 million
1946 Cancellation of Air Training Debt C$425 million
Total: C$3,468 million

Plus the cost of wartime requirements in Canada was estimated at a further C$7,441 million to the end of 1944. Payments by Canada in respect of its forces overseas was $C1,580 million, and the amount found by the U.K. out of its current earnings was $1,104 million. The rest was met by the sale of securities, gold payment and other means.

Canadian war materials delivered in Canada were 34%, to the U.K. 53%, the U.S., 12% and Other United Nations 1%. By trebling industrial capacity, Canada became a second major source of munitions in the Commonwealth.

Canadian production of military vehicles ended in 1946 with 247 produced, and the attention then turned to working with the motor industry in readiness of any future conflict that resulted in General Motors and Dodge vehicles being ready for service in Korea.


David Hayward, December 2000


_________________________________

Over the whole of the period of the war, the U.K. supplied 69.5% of the munitions available to the entire British Commonwealth of Nations, including the U.K. itself. The other 30.5% was supplied from Canada [7.9%]; the rest of the Commonwealth [1.6%]; the U.S. under Lend-Lease [17.3%] and purchased for cash [3.7%]. However, in the critical early period of the war the U.K. supplied 90.7% of the munitions of the Commonwealth in the first fifteen months. British contributions on the economic side thus outweighed even Lend-Lease[1] and the later Mutual Aid contributions made by North America to the U.K.[2] Similar agreements were made between the U.S. and other countries in receipt of lend-lease aid. These contributions from North America helped to maintain the productive economic and military capacity of the centre of the Commonwealth.[3]
The Lend Lease Act: "An Act to Promote the Defense of the United States": Public Law 11-77th Congress, Chapter 11-1st Session H.R. 1776, Approved 11 March 1941.
[5] Duncan Hall, P.23, ibid. See also Lend Lease Act, ibid.
[6] M.M. Postan, P.238, ibid.
4 Duncan Hall: Munitions Supply from Canada P.46.
[8] P.47, ibid.
[9] P.47, ibid.
[10] P.52, ibid.
[11] P.53, ibid.
[12] P.53, ibid.
[13] Dr William Gregg, "Blueprint for Victory", Canadian Military Historical Society, Pp.33-35.
[14] Duncan Hall 1(iii) Supply from the United States, P.19, ibid.
[15] Duncan Hall, P.20, ibid.
[16] Duncan Hall, P.4, ibid.
[17] Duncan Hall, P.21, ibid.
[18] Duncan Hall, Pp. 285-291.
[19] Duncan Hall 1(iv) Munitions Supply from Canada, P.48, ibid.
[20] Yeager, L. B. 1976. International Monetary Relations: Theory, History, and Policy. 2nd ed. New York: Harper & Row, P.310.
[21] Macmillan Report. 1933. Royal Commission on Banking and Currency. Proceedings and Evidence. Ottawa. P.22.
[22] Macmillan, P.22, ibid.
[23] Shearer, R. A. and C. Clark. 1984. "Canada and the Interwar Gold Standard, 1920-35: Monetary Policy without a Central Bank." In A Retrospective on the Classical Gold Standard, 1821-1931, 277-310. Edited by M. D. Bordo and A. J. Schwartz, NBER Conference Report, Chicago: University of Chicago Press.
[24] F.W.D. trucks from the Four-Wheel Drive Truck Company were ordered direct, and demand was such that other companies manufactured to sub-contract, followed by U.K. licence production by Peerless. Simms magnetos and dynamos were used in all manor of equipment, but the London factory could not cope with demand, and so Simms' East Orange, NY factory exported large numbers of units to the U.K.
[25] Statutes of Canada 1935.
[26] Watts, G. S. 1993. The Bank of Canada, Origins and Early History. Ottawa: Carleton University Press.
[27] Bank of Canada. Annual Report, 1939, P.13.
[28] Economist, One Hundred Years of Economic Statistics, Table UK-17, and Annual Abstract of Statistics, Banking and Currency, Table 306, P262, per Bank of England Library
[29] Bank of Canada 1940, P.12.
[30] One Hundred Years of Economic Statistics, ibid.
[31] Towers, G. 1940. "An address presented at `Study Course.' " Foreign Exchange Review Board, 1 April.
[32] One Hundred Years of Economic Statistics, ibid.
[33] Handfield-Jones, S.J. 1962. "Foreign Exchange Developments since the Formation of the Bank of Canada." Bank of Canada memorandum, 14 May.
[34] Foreign Exchange Control Board. Annual Report, 1946, P.19.
[35] Wonnacott, G. P. 1959. "The Canadian dollar, 1948-1957." PhD dissertation, Princeton University.
[36] F.E.C.B, 1946, Pp.9-10, ibid.
[37] F.E.C.B, 1946, P.26, ibid.
[38] F.E.C.B, 1947, P.7
[39] Rasminsky, L. 1946(?). "Unofficial Market in Canadian dollars." Bank of Canada memorandum, date unknown.
In a 1948 University of Chicago debate with Donald Gordon, Deputy Governor of the Bank of Canada, and Dr. W. A. Mackintosh, head of the economics department at Queen's University and wartime economic adviser to the government, Friedman argued that there was no particular reason why a small market should necessarily lead to a distorted price. He also argued strongly that Canada should introduce a flexible exchange rate rather than relying on a system of exchange controls to balance trade. Gordon, on the other hand, contended that a 10 % decline in the official Canadian dollar (to roughly the level prevailing in the unofficial market) would have comparatively little impact on trade flows (Friedman et al. 1948).
[40] Friedman, M., D. Gordon, and W.A. Mackintosh. 1948. "Canada and the Problems of World Trade." Round Table , 13 April. Chicago: University of Chicago.
[41] Duncan Hall, P.55-6, ibid.
[42] Duncan Hall, Table 2, P.58, ibid.
[43] Duncan Hall, Table 3, P.61, ibid.
[44] Duncan Hall, P.61, ibid.
[45] Duncan Hall, P.61, ibid.
[46] Duncan Hall, Table 32, P. 483, ibid.
[47] Duncan Hall, Pp.62-65, ibid.
[48] Financial Agreement between The Governments of the United States and the United Kingdom", 6 December 1945, Cmd 6708.
[49] Cmd. 6778, March 1946 and Cmd. 7471, July 1948.
[50] Duncan Hall, Pp.477-482, ibid.
[51] Branham's Automotive Yearbook, 1948, Branham Publishing Company, Chicago, USA.
[52] Canadian National Archives.
[53] "Financial Agreement and Agreement on the Settlement of War Claims between the Governments of the United Kingdom and of Canada", 6 March 1946, Cmd. 6904, September 1946: H. Duncan Hall "North American Supply"; Ed. Sir Keith Hancock: "History of the Second World War- United Kingdom Civil Series", P.524., HMSO and Kraus International Publications, N.Y.
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