Vote of Confidence

For the first time in twelve years, the government of Canada last week went to the U.S to float a bond issue. To help fatten Canada's foreign exchange reserves, five giant U.S. life insurance companies, led by Prudential,* agreed to buy $250 million worth of 25-year, 5% Canadian government bonds. Avowed purpose of the loan was to make it possible for the Canadian government to cancel part of a still unused $400 million credit with the U.S. Export-Import Bank. Its real purpose: to give the world a massive demonstration of investor confidence in the Canadian economy.

The need for a public vote of confidence was undeniable. Barely 2 1/2 months ago, the Canadian dollar was sagging under speculative attack, foreign capital was fleeing, and the nation's gold and foreign exchange reserves had plummeted to $1.1 billion, a drop of nearly 50% in less than six months. With disaster looming. Prime Minister John Diefenbaker (who had just fought an election campaign on the stand that the Canadian economy was in great shape) found himself obliged to borrow $650 million from the International Monetary Fund, Britain and the U.S. To prevent the borrowed money from being consumed by Canada's massive balance of payment deficits, the Diefenbaker government also slapped on a series of stringent austerity measures that included upping the central bank rate to a tight money 6% and raising tariffs on 50% of Canada's imports by means of "temporary surcharges" that range from 5% to 15%.

Perking Up. With the help of this bitter medicine, the patient is clearly perking up. With production running 29% ahead of last year, Canada's automakers expect this year will be second only to 1956, when 468,000 cars were built. Steel production is on the rise, and unemployment, which has dogged Canada even harder than the U.S., dropped in August from 6.4% of the work force to 5.9%.

Watching the Canadian dollar firm up, private investment from abroad had begun a gingerly return, with the result that the nation's gold and foreign exchange reserves were up to $1.68 billion, not counting the crisis loans. With cautious optimism, the Bank of Canada fortnight ago lowered its interest rate to 5 1/2%. Exulted Economist Scott Gordon of Ottawa's Carleton University: "Our back is no longer against the wall." But for all its reassuring internal prosperity, Canada has yet to solve its basic problem: the fact that for years it has bought more abroad than it has sold and has made up the difference only by attracting foreign investment. For the first half of this year, Canada's imports ran a whopping $126,300,000 more than its exports. Presumably, the tariff surcharges would improve the record in the second half of the year by discouraging imports. But the surcharges offer no permanent answer: already exporters around the world are complaining loudly over lost Canadian sales, and other nations cannot be expected to tolerate the surcharges indefinitely without retaliating with increased tariffs on Canadian goods.

Facing Up. Part of the long-term answer, obviously, is for Canada to increase its exports. In a campaign to do so, the Diefenbaker government plans to spend $500,000 and fly 700 foreign buyers into Canada to give them a firsthand look at Canadian goods. More important, the word is out in Ottawa that the government is preparing some Draconian measures for the opening of Parliament later this month. Among those most strongly rumored is the possible elimination of the 15% extra tax on dividends paid to foreign investors. In addition, the government is considering a reduction in corporate and high-bracket personal income taxes to stimulate increased domestic investment.

Such proposals would inevitably draw fire from many Canadian voters. But at the moment of its greatest political weakness--it no longer has a majority in Parliament--the Diefenbaker government at last seemed inclined to face up to economic realities and hang the political expense.

* The others: Metropolitan, Equitable, New York Life, and John Hancock.

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