Customs Administration in Canada 9781442632110

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CUSTOMS A D M I N I S T R A T I O N IN CANADA

C A N A D I A N STUDIES I N E C O N O M I C S A series of studies sponsored by the Canadian Social Science Research Council, and edited by V. W. Bladen. 1. International Cycles and Canada's Balance of Payments, 1921-33. By Vernon W. Malach. 2. Capital Formation in Canada, 1896-1930. By Kenneth Buckley. 3. Natural Resources: The Economics of Conservation. By Anthony Scott. 4. The Canadian Nickel Industry. By O. W. Main. 5. Bank of Canada Operations, 1935-54. By E. P. Neufeld. 6. State Intervention and Assistance in Collective Bargaining: The Canadian Experience, 1943-1954. By H. A. Logan. 7. The Agricultural Implement Industry in Canada: A Study of Competition. By W. G. Phillips. 8. Monetary and Fiscal Thought and Policy in Canada, 1919-1939. By Irving Brecher. 9. Customs Administration in Canada. By Gordon Blake.

Customs Administration in Canada AN ESSAY IN TARIFF T E C H N O L O G Y

BY

G O R D O N BLAKE UNITED COLLEGE, WINNIPEG

U N I V E R S I T Y OF TORONTO P R E S S : 1957

Copyright © , Canada, 195? by University of Toronto Press Printed in the Netherlands

To S. M. B.

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PREFACE

THE CANADIAN TARIFF has been a singularly faithful mirror of economic and political change in this country, but it is a glass through which much has been seen darkly. This study is an attempt to improve the view. It traces the administration of the tariff through Canadian history, and its findings suggest that, when examining a country's commercial policy, it is well to give attention to the implementing acts as well as to the enabling acts. The greater part of the manuscript was written under the supervision of Professor G. A. Elliott of the University of Toronto. Any indications of precision in expression and rigour in economic theory that it may contain are the result of his kindly but firm refusal to have it otherwise. Professor W. T. Easterbrook gave encouragement and advice on the historical sections, and Professor Malcolm Taylor provided criticism concerning its implications for Political Science. Mr. Ray C. Labarge, General Executive Assistant in the Department of National Revenue, opened many doors in Ottawa and elsewhere, and I am grateful to the men who invariably refrained from slamming them. I am heavily indebted to the Canadian Social Science Research Council, which provided financial assistance for research, typing, and publication. The Maurice Cody Memorial Foundation made possible a year of uninterrupted research at a critical stage in the project. Professor V. W. Bladen and the staff of the University of Toronto Press efficiently guided the study to publication. United College Winnipeg, Manitoba

GORDON BLAKE

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CONTENTS

PREFACE

vii

I. INTRODUCTION

3

II. CUSTOMS ADMINISTRATION DURING THE FRENCH RÉGIME Customs Methods in New France III. CUSTOMS ADMINISTRATION UNDER BRITISH DOMINION . . . . . . The Customs Administration in the Struggle for Responsible Government Administrative Confusion Smuggling in British North America Free Ports and Other Meliorative Devices Free Ports Customs Drawbacks and Bonded Warehouses

18 24 26 35 35 38

IV. SOME EARLY CUSTOMS PROBLEMS Customs Union in the Canadas Reciprocity and the Gait Tariff Ad Valorem Duties and Their Administrative Consequences

. .

40 40 46 51

V. THE CUSTOMS ESTABLISHMENT IN BRITISH NORTH AMERICA . . . . Civil Service Control The Establishment Conditions in the Service Publicity of Customs Information

54 56 58 63 66

VI. CONFEDERATION AND THE NATIONAL POLICY Confederation and Customs Union The National Policy VII. THE TARIFF SCHEDULE Forms of Duty-The Tariff Rate Columns in the Tariff Classification of Items in the Present Tariff . Specialization of the Tariff VIII. VALUATION The Evolution of the Valuation Provisions Valuation and High Protection Reaction against Administrative Protection General Reaction Textiles The Effect of Pre-War Agreements The Effects of War The General Agreement and Valuation

10 11 15

68 68 71 74 74 77 83 86 94 96 99 102 102 105 107 108 109

X

CONTENTS

IX. APPRAISEMENT Preliminary Procedures The Role of the Appraiser Imperfections in Appraisement The Board of Customs The Appraisal Branch The Check Branch Causes and Effects of Imperfect Appraisement Appeals to the Tariff Board Appeals to the Exchequer Court The Customs Broker The Canadian Importer and the Problem of Appraisement . . . X. THE CUSTOMS ESTABLISHMENT SINCE CONFEDERATION Organization Problems of Adjustment Political Patronage in the Customs Service The "Customs Scandal" Causative Circumstances Public Disclosure Reform in Appraisement Reform of the Preventive Service Morale and Efficiency The Department of Customs since 1928 XI. THE "SCIENTIFIC TARIFF" IN CANADA The Canadian Tariff Board

117 118 119 120 120 121 122 122 124 128 130 131 136 136 138 140 142 143 144 147 147 152 154 159 164

XII. CONCLUSION

168

NOTES

173

INDEX

187

CUSTOMS A D M I N I S T R A T I O N IN CANADA

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CHAPTER ONE

INTRODUCTION AN EXAMINATION of the literature of economics relating to Canada discloses no cohesive treatment of tariff administration and its importance to the development of Canadian commerce. Because of the high degree of applicability of the theory of the staple to the economy of Canada, and the resulting awareness on the part of the people of the importance of public policy to their economic condition, the tariff has been recognized as an economic institution of great significance. Canadian governments have relied heavily on the tariff as a determinant of the nature, volume, and direction of external trade. But despite the importance which has been attached to the tariff, its administration has been given relatively little attention, except as marginal to the tariff issue itself.1 One may search in vain in histories of the tariff for an account of the development of customs practice in this country. Yet all writers on the tariff are likely to agree that the modern tariff is the result of a long evolutionary process, and it follows that there must have been a parallel development in its administration. The Canadian tariff, like any other form of taxation of any time or place, has been conditioned in no small way by the circumstances surrounding its administration. From the crude exaction of tribute to the modern sophisticated income tax, administrative science and administrative feasibility have been important elements in the tax environment. It is one of the contentions of this essay that within the administration of the Canadian tariff there is more for the economist to study than the mere technical implementation of a given body of statutes. The term "customs administration" will be employed in this study within rather elastic limits. "Customs administration" in the narrow sense means the application of the tariff schedule to importations of commodities across national boundaries. This is, to be sure, an important aspect of it, and the problems involved in this simple conception of the term are not inconsiderable. To quote Professor T. E. G. Gregory, ". . . there is no stage in the chain of events which leads from the legislative inception of the tariff down to the practical administration of its details which does not reveal unsuspected difficulties of choice between alternatives."2 But "administration" is here taken in a wider sense as well, which is more adequately described by the term "tariff technology." For administration can have much to do with the actual making of the tariff. For instance, the decision as to whether the basis for the tariff will be specific or ad valorem rates of duty, a mixture of the two types, or a combination thereof in the form of compound duties, is likely to be made in the light of the experience and expert judgment of someone other than an elected member of a legislative body. Questions of administrative feasibility and economics, as well as political desirability, are clearly involved. Similarly, the adoption of a multiple-column tariff by Canada, while it is a reflection of certain political necessities, is obviously more than that. It is an administrative device, developed for the purpose of achieving the ends of a policy in the best possible way from the point of view of administrative efficiency. It is probably true, as well, that the form

4

CUSTOMS ADMINISTRATION IN CANADA

of every item in the tariff has been affected in some manner by the needs of administration. In addition to such internal effects, there is a further body of tariff practice which may reflect administrative influence even more clearly. Systems of bonding, of warehousing, of drawbacks and of free ports, where they exist, are all meliorative devices designed to facilitate the administration of political and economic decisions. Finally "administration," as here employed, is influential in the broader, tariffmaking sense. The findings of boards of customs, of tariff boards, of royal commissions, of special commitees, and of boards and courts of appeal have had a distinct influence on the tariff. It is proposed to include these within the limits of the term. It will be obvious that the problem is, for the greater part, technical. This study is not intended to constitute an argument on either side of the policy controversy as regards free trade or protection, any more than it is intended to be a linearly historical treatment of Canadian commercial policy. It is merely an attempt to fit into the Canadian environment certain more or less theoretical concepts, which may serve to explain the tariff as an important economic institution. The Canadian tariff happens to be one of the most diversified and complex in existence. Canada has, in fact, run the course of tariff experience. The purposes of customs duties can be broadly classified under two headings: first, the collection of revenue; second, the regulation of trade in accordance with some commercial policy. It is not unusual to find a combination of these two objectives, since the two are mutually exclusive only in certain ranges of their application, and even in these ranges generalization is unwise when we do not know what elasticities may exist. Within these limits there may also occur a wide range of possibilities, allowing for what are usually termed "revenue duties with incidental protection." Such duties might be as readily termed "protective duties with incidental revenue," but are not, no doubt for sufficient diplomatic reasons. The question as to whether there is a logical difference between "protection" and "incidental protection" is in any case a fruitless one and need not detain us. What constitutes a customs duty in the strict sense is another question which need not be pursued very far. By the time in history at which this study begins, usage had sufficiently defined the term, if not the derivation. It is interesting, though not surprising, however, to find that the Canadian customs, in most of its aspects, is of Anglo-Saxon origin. According to Professor N. S. B. Gras "The English Customs originated at home, on the initiative of the king, through prerogative right, and in money dues rather than prises." 3 For the present purpose almost any dictionary definition will suffice: "Duties, tolls or imposts imposed on imports or (now rarely) exports" (Webster). As this definition suggests, duties incidental to the importation of commodities are the ones principally encountered. The imposition and collection of taxes are obviously problems of law and administration. The law usually finds it necessary to be explicit. In Canada this explicitness takes the form of a body of regulations which are found in two separate but closely connected acts, the "Act Respecting the Customs" or the "Customs Act," and the "Act Respecting the Duties of Customs" or the "Customs Tariff." This separation is not made in all countries, but in Canada, it gives tangible form to the existence of two different approaches to the subject of cus-

INTRODUCTION

5

toms duties. The Customs Act, representing the approach from the side of "customs law," may be called the enabling act, since it is concerned with the general regulations controlling the importation (or exportation) of commodities. It contains as well the law with respect to the administration of the customs, but it is important to note that in this respect it is not perfectly explicit, in so far as it does not set out all the details of Canadian customs administration. The extent to which it fails to do this is, in fact, of no small importance, for it suggests that there is somewhere a supplementary body of administrative regulations not explicitly described in the Customs Act, which merely grants authority to the executive branch of government to make further regulations to suit administrative expediency. The phrase, "The Governor in Council, may, from time to time, make regulations" is not an uncommon one. Outside the statutory regulations then may be found the orders-in-council, departmental regulations, memoranda to port collectors, and similar communications, out of which emerges what is sometimes termed an official tariff, as distinct from a legislative tariff. If a careful examination of all these supplementary regulations and instructions still leaves the picture of the customs administration incomplete, the conclusion may well follow that in addition to according wide limits to executive discretion, the Canadian customs system may be unique in that it seems to permit a considerable amount of official discretion at somewhat lower levels of the administrative hierarchy. Judgment as to the extent and probable effects of this administrative flexibility will have to wait, however, upon further analysis. The Customs Act, since it has this general nature and is primarily a codification of evolutionary principles of customs law, is unlikely to be changed often. It is, of course, subject to legislative amendment, and, particularly in periods of economic and political change, certain provisions may be rather drastically altered. There have been roughly a dozen such amendments since the revision of the statutes in 1927. Nevertheless, taken as a broad body of regulations, and especially when compared to the Customs Tariff, it is a relatively permanent document. The Customs Tariff represents the approach from the side of "tariff law." As its title suggests, it is concerned with a schedule of charges imposed upon the importation (or exportation) of commodities.4 It may be usefully termed the implementing act, in the sense that it provides for the specific application of the broader regulations of the Customs Act to particular commodities. In effect, the Customs Act says, "There shall be a tariff; the Tariff Act says, "The tariff shall be such and such." The Customs Tariff is, from its nature, more likely to undergo amendment. Changes in its items and rates occur often under the pressure of various forces which mould commercial policy. The rates may be changed, for instance, for the purpose of adjusting the revenue position of the country, that is, for purely budgetary reasons. They may be changed broadly as the result of an altered governmental outlook with respect to the need of the domestic economy for protection. Many changes, not autonomous in nature, are made as the result of, or in anticipation of, trade negotiations with other countries, while others of a more or less technical nature, are associated with new types of commodity. Still other changes are merely for administrative facility. Canada, like most countries, has had recourse to some rather odd manipulations of tariff schedules in efforts to meet peculiar situations, as, for example, regionally differentiated rates on certain fresh fruits and vegetables, which are applied and withdrawn at different dates in different areas according

6

CUSTOMS ADMINISTRATION IN CANADA

to the lateness and duration of the domestic growing season. These are largely matters of policy in the wide sense, and it is scarcely necessary to state that policy broadly determines the nature of both the Customs Act and the Customs Tariff, though in somewhat different ways. The presentday Canadian tariff is an inclusive one; the Customs Tariff therefore requires as much legislative attention as does the Customs Act. In the earlier days of simple revenue duties the approach from the side of tariff law received less emphasis. It seems altogether unlikely, however, that in practice Canadian legislators have been much concerned over the distinction between the two, which may after all be largely academic. The late Rt. Hon. R. B. Bennett on one occasion took the trouble to instruct the House on the matter, but later debate gives little evidence that he was taken seriously by his listeners.5 The division of subject matter between the two acts is not always perfectly logical. It is puzzling, for example, to find an anti-dumping provision in the Customs Tariff. To be sure, this provision does define a tariff rate for certain classes of goods, but in addition it states general customs policy and prescribes procedures, and it might be expected, for this reason, that it would appear in the Customs Act. The reason for its original presence in the Customs Tariff may be related to the statement of the Minister of Finance, W. S. Fielding, in 1904, that it was "a temporary measure designed to meet a temporary situation." This provision has become an integral part of the Canadian tariff. It is noteworthy, however, that it was suspended between 1941 and 1947, by orderin-council, in order to facilitate the holding of the price line during the period of price control. Canadian tariff and customs law received its present general form with Confederation, or, more accurately, a year before that event, when the Province of Canada enacted legislation which attempted to include the requirements of the Maritimes, in the hope, which was justified only in the short run, that it would suffice for a Confederation tariff (29-30 Viet., c. 6). With Confederation, however, it became necessary for customs and tariff legislation to pass into the hands of the central government. At the same time the tariff had to be carried over the legislative hiatus. This was provided for in section 122 of the British North America Act: The Customs and Excise Laws of each Province shall, subject to the Provisions of this Act, continue in force until altered by the Parliament of Canada.

The first Parliament of Canada put an end to provincial customs-tariff autonomy the following year by making the further provision: So much of Provinces of provision in repealed (31

any Act of the Legislature of the late Province of Canada or of either of the Nova Scotia or New Brunswick as imposes any duty of customs or makes any any matter provided for by this Act or is inconsistent with this Act is hereby Viet., c. 7, s. 19).

In the transitional period, before the pattern finally became set in its present form, there appears to have been some legislative confusion with respect to the customs and tariff aspects of the laws. Three acts in 1867 made the necessary provisions for the operation of the customs: c. 5, for "The Collection and Management of the Revenue"; c. 6, "An Act Respecting the Customs"; and c. 7, "An Act Imposing Duties of Customs, with the Tariff of Duties payable under it." This last contained no fewer than twenty explanatory clauses and

INTRODUCTION

7

was to be construed "as one Act with the Act respecting the Customs." In the following year c. 44 in like manner amended both Customs and Tariff Acts, but thereafter the partition between the two received fairly consistent legislative recognition. It remains apparent, however, that, as suggested previously, Canadians have not worried unduly over the logical distinction between the two. It is convenient to turn now to other characteristics of the general environment of the tariff, reserving the more detailed examination of the Customs Tariff and Tariff Act, and of the actual tariff structure, for later chapters. The existence of customs and tariff laws implies the existence of a law-making body and a customs area. Customs areas, of course, do not necessarily coincide with those of a sovereign state, although many of them do. The "area" of Canada has shown variety in this respect. It is not possible, for instance, to speak of a "Canadian" territory in the colonial period, as colonial possessions must be considered logically as part of the national territory of the possessing country. It is no more useful to attempt to think of the Canadian customs area in this period than it would be to attempt a survey of the Atlantic fisheries from the point of view of the fish.6 In Canada the difference between the area over which sovereignty was claimed and the actual extent of the customs area may be illustrated by examining the situation from the point of view of France and of Britain. There emerges a picture which reveals the opposing forces of French and British mercantilist exclusiveness, and even an incipient American influence. The French naturally enough conceived of their political sovereignty in New France as open-ended, a simple result of a lack of geographical knowledge. The wording of their charters of monopoly shows this absence of limitation7 as clearly as the maps of that period. Mercantile exclusion was likely, however, to set as strict limits to the customs area as possible at points of contact with the English. French commercial thinking was much occupied with the administrative problem involved in maintaining a politico-economic identity, and the floods of administrative regulations emanating from France give evidence of this interest, while the extreme severity of penalties provided for non-compliance suggests that the impossibility of enforcing them was recognized.8 It was only through the control of navigation that the French made any real attempt to carry out their policy and even there they appear to have failed rather dismally, owing largely to the inability of the chartered companies to provide sufficient supplies to the colonies, and to the resulting need to smuggle in order to survive.9 There was no customs frontier in the modern sense enclosing New France. Customs administration was feasible, if at all, only in the area adjacent to the principal colonial ports, and in the ports of France itself. Along the land frontiers there was little control, and the merchants of the St. Lawrence relied heavily on illicit trade with the English colonies for whatever prosperity they enjoyed.10 Economically this lack of a well-defined customs area in the period of French domination may be of small importance, when it is recalled that the deliberate exclusion of French capital from the colonial field, and general lack of interest in the Canadian trade, made New France a decided financial liability to the mother country.11 Historically, the attainment of a distinct and unified customs area comes most easily when it follows political unification,12 but France never attained her political objectives in North America, or achieved anything approaching an administrative entity in New France. The substitution of British mercantilist colonialism for French after 1763 altered this situation less then might have been expected. Although some of

8

CUSTOMS ADMINISTRATION IN CANADA

the pressures formerly exerted by the Thirteen Colonies on their northern neighbour were removed, to reappear only after the American Revolution, exclusiveness was still the central commercial idea. The retention of St. Pierre and Miquelon in French hands, however, raised problems far out of proportion to the size of these small holdings. But the step of creating a North American customs area through a process of tariff assimilation was not taken by the English. Not only were there geographical and political impediments to hinder such a project, but there was also the heritage of a distinctive French fiscal tradition and, perhaps more significant, an extremely casual attitude on the part of Imperial authority concerning the administrative and commercial requirements of the various colonies. The period between the fall of Quebec and the revolt of the American colonies was in any case marked by great fiscal confusion. In Quebec the English conquerors satisfied themselves with a casual attempt to collect the same duties that the French had imposed.13 The general failure to view the customs needs of the colonies in their interrelationships created internal customs lines within an area which constituted, in the broader political sense at least, a single national territory. Not only was the line between Quebec and the colonies to the south at least as difficult for the English to administer as it had been for the French ferme générale** but also when the revenues were to some extent collected successfully, the collectors were charged with discriminating against Quebec and favouring the other colonies in the London fur market.15 Sir Guy Carleton was disturbed over the badly balanced trade and revenue of Quebec with respect to the other colonies.16 These various difficulties were a reflection of the fact that commercial integration had failed to follow the flag; there was no coincidence between the customs area and the area of political sovereignty. It is clear that good political reasons can partly excuse this failure. Already the American colonies were acting in a manner which made Carleton afraid of the possible political consequences of a free trade area17 which would include those malcontents. The customs lines between Quebec and Nova Scotia and New Brunswick further complicated and obstructed rational customs development. As original British colonies, Nova Scotia and New Brunswick began to seek financial independence at a much earlier date than did Quebec, and their peculiar commercial interests led to a tariff policy different in important respects from that of the inland colony. According to Professor Brebner, Nova Scotia began her tariff career not with the revenue duties which one usually associates with early Canadian tariffs, but with protective duties fostered by local distilling interests,18 proving that the tariff lobby is not a recent phenomenon. New Brunswick, however, employed revenue duties, as did Prince Edward Island. As the areas of the west developed, the number of customs lines within British North America increased. Assiniboia established revenue duties in 1835, with modifications forced by another pressure group, the Hudson's Bay Company. The Crown colonies of British Columbia and Vancouver Island also adopted this type of impost. This brief tracing of the idea of a customs area through early Canadian history indicates that in a period of colonial extension one is likely to find quite the reverse of the general tendency to embrace in a common customs system areas which are geographically contiguous and politically identified. Such a statement may admittedly rest on a rather broad view of political identification. The fact remains, however, that the colonies in North America were, in both the French

INTRODUCTION

9

and British periods, grouped under common political sovereignty. Not until Confederation does it become possible to say that one is dealing with a national territory, and that the identity between the area of political jurisdiction and customs jurisdiction can be accepted without qualification.19 The relative ease with which Newfoundland recently entered the political and fiscal jurisdiction of Canada suggests that this identity is now unquestioned. Public reaction to proposals involving commercial union with the United States provides further evidence that the customs frontier and the political frontier are one and the same line and are clearly recognized as such.20 It should be observed that, in addition to this physical or spatial aspect of the customs-tariff environment, there are other "situations" which have a practical effect on tariff making and administration, by altering the periphery of customs tariff jurisdiction. Canada has had experience, through her commercial history, with all these situations, which include customs union, reciprocity, preferential arrangements, customs and/or tariff assimilation, free ports, and most-favourednation relationships, and it is well to note that they have all had implications for administration. It is not considered essential to this analysis, however, to review in detail the various aspects of these custom-tariff forms, since they possess a voluminous bibliography.21 The foregoing has been intended as a background for the study of customs administration in Canada. It has appeared necessary, partly for reasons of space, to avoid the tautology of a detailed history of Canadian tariff policy, which has already received considerable attention in its broad as well as in some of its narrow aspects. The following account of the development of customs practice follows more or less historical lines up to, and somewhat beyond, Confederation. It should not, however, cause surprise, that from that point the analysis changes in character. By the time the National Policy came into being, many of the important elements of the customs tariff had become set in the pattern which exists today. The majority of administrative problems of the past seventy years have had a remarkably familiar appearance. In one sense, therefore, this study of customs administration will merely confirm a fact that is already well known, namely, that tariffs are ancient things.

C H A P T E R TWO

CUSTOMS ADMINISTRATION D U R I N G THE FRENCH REGIME THE CUSTOMS ADMINISTRATION of the French colonial empire in North America was primitive, since commercial policy was for the greater part confined to outright prohibition of trade with any outside area—a corollary of mercantilism. A policy of exclusion leaves no room, supposedly, for degrees of preference against outsiders, but it might be held that the failure of administration to meet the demands made upon it did result in a peculiar kind of colonial preferential system, the deterrent to trade with foreigners being, not a differential duty, but the serious consequences of detection; and in the days of mercantilism the penalty to the smuggler for failure was often more than a merely economic one.1 The internal trade of the empire was also subjected to mercantilist restrictions, which discriminated in favour of certain Frenchmen and against others; commercial life was a tissue of monopoly privileges. But these internal restrictions were of a different degree from the external. During the forty years following 1674 trade between New France and the mother country was relatively free, and was apparently based upon a rough idea of economic complementarity. It was a forced method, however, since France retained all policy decisions in her own hands, leaving the trade of Canada in a continuing state of uncertainty. Nor did this policy reduce the administrative problem; on the contrary, the attempt to encourage commerce through freer trade added to the difficulties of administration. The English colonies were the disturbing influences in this respect. The "duty of the Western Dominions" arose out of the failure of the chartered companies to meet the growing demands of the colony for trade with France. Not being powerful enough in ships or capital to meet these demands, the companies established a licensing system, letting sub-contracts to other companies. There resulted from this practice a privately operated customs administration. Fees were collected from the sub-contracting companies in the form of tonnage duties and a levy of 5 per cent on all merchandise leaving the colony. After 1670, when the Crown decided to repossess New France from the chartered companies, it suppressed the tonnage duties and reduced the 5 per cent export duty to 3 per cent. This duty was retained on all goods but grain, butter and a few others until the end of French control in Canada. Except for a short period it was collected by the farmer of the revenue. France was in serious financial trouble after 1700, and this had its effect on Canada, but the colony had its own problems as well. The beaver trade had been declining, and there were wide fluctuations in exports, which in turn affected exchange and imports. The basis of the revenue became increasingly uncertain. With declining fur prices, and with a relative inelasticity of demand which was the result of the limited nature of the market, the use of ad valorem export duties led to reduction of the revenue. To offset this a new tariff schedule was proposed in 1703, containing specific duties and emphasizing import duties.2 Whether or not these new duties actually went into effect is not certain. The

THE FRENCH REGIME

11

colony's balance sheet of 1705 does not show any revenue from these new i m ­ port taxes. For a short period after 1700 the farming of the revenue was discontinued, and individual merchants agreed to collect the export duties themselves bybuying furs on their own account and turning over the duties to the govern­ ment. This method of raising revenue failed, as did a later method of com­ pounding for the revenue at 70,000 livres per annum. The revenue was again farmed, and continued to be until the Treaty of Utrecht i n 1713. After this set-back France returned to a more narrow and exclusive commercial policy, i n an attempt to meet serious financial commitments i n Europe. This placed the Canadian fur trade at a still more serious disadvantage relative to that of the English colonies, and the difficulties of collecting the revenues increased. I n 1717 the tax farm was merged w i t h the "Company of the West," later called the "Company of the Indies." which was part of Law's ill-fated Louisiana Scheme. The colonial section of this company survived the debacle of 1721 in France, and continued its administration of the Canadian revenues until the end of the French period. I n 1746 the wine and liquor duties were increased i n an attempt to make the colony carry more of its own fiscal burden, and a quite extensive tariff of excise and import duties appeared i n that year. The later years of French control were marked by new and stricter regulations and licensing requirements, intended to force the trade of Canada through the prescribed channels to the mother country. Obviously France was encountering in North America the problems that have challenged the Canadian customs administration throughout its history: namely, a vast geographical area which makes administration difficult and expensive; high transportation costs which tend to render the east-west flow of trade unnatural; wide fluctuations i n the volume of trade; and long and severe winters which limit inland navigation. New France d i d have, by exception, a favourable balance of trade i n 1741, but from that year to the end of French rule the importunate demands of military strategy and the corruption of Bigot and his associates created a commercial and financial shambles. Individuals sought their private fortunes i n the large ex­ penditures of the French government, rather than through legitimate trade. Inflation destroyed the revenue, and the customs duties declined i n importance as the colony sank into bankruptcy. 3

4

5

6

C U S T O M S METHODS I N N E W F R A N C E

Customs-tariff policy, while determined by France, was locally applied i n New France by proclamation of the Intendant, and, w i t h the exception of the 3 per cent "duty of the Western Dominions," was administered from within the colony. According to the evidence available, the early chartered companies which col­ lected the revenue were both corrupt and inefficient, although i t must i n fair­ ness be noted that these companies were required by France to achieve quite impossible results for the furtherance of the glory and power of the Crown. Considering the great monopoly privileges that they enjoyed, however, their al­ most continual state of bankruptcy indicates either that they were quite incap­ able of projecting a balance sheet w i t h any degree of accuracy, or that they broke down as a result of the administrative difficulties that they encountered. Rigour of administrative regulations and severe penalties for non-compliance are

12

CUSTOMS ADMINISTRATION I N CANADA

usually an accurate reflection of such difficulties. The chartered companies had no lack of formal support from the government i n carrying out their adminis­ trative tasks. For example, the West India Company, which collected the revenues between 1664 and 1671, succeeded in having strict regulations enacted to prevent illicit trade. The company also found it necessary to employ the costly method of placing a twenty-four hour watch on each ship in Quebec harbour, and visiting these ships during the hours of darkness was prohibited. Adding to the difficulties of collecting the revenue by this means was the fact that corruption was not confined to the administration of the chartered companies. French Canadian merchants displayed a marked degree of economic rationality, and no laws, especially weak ones, would dissuade them from seeking favourable business conditions. I n the general administrative positions of the colony salaries were so inadequate that degrees of official honesty seem to have been taken for granted. The coureurs des bois had powerful collaborators in the settlements, and i t was darkly hinted that Frontenac himself derived financial benefit from the illicit trade w i t h the English. The creation by France of a bonded warehousing system in 1664 was an important development i n customs administration. The French metropolitan market proved to be unable to absorb all the products of the colonies, and France became aware of the advantages of an entrepot trade i n these commodities. Neither her mercantilist tradition nor Colbert's views on colonial liberty could be expected to be compatible w i t h free trade between the colonies and foreign countries. A n administrative solution was therefore found in the invention of the bonded warehouse, which, while giving some of the effects of free trade w i t h i n the empire, retained for the mother country the direction of colonial com­ merce, along w i t h such economic advantages as international trade i n these products might provide. Customs warehouses were established in several French cities for storing goods in transit. The edict of 1664 allowed colonial products to be received into these warehouses without the payment of any import or export tax, provided they were later exported to foreign countries. Only about twenty years later was this privilege extended to goods coming from foreign countries. Canada, along w i t h other French colonies, could therefore claim to have been responsible for the adoption of this important customs technique. Sudden changes i n customs regulations and formalities usually result i n dif­ ficulties of interpretation. For thirty years the effective functioning of the bonded warehouse system was impeded by controversies between the merchants and the clerks appointed by the tax farmers. But the value of the technique was, apparently, finally proven. The edict of 1717, section 15, declared: 7

8

Merchandise and all raw materials from the islands and French colonies may on their arrival be warehoused in the ports of Calais, Dieppe, L e Havre, Rouen, Honfleur, la Rochelle, Bordeaux, Bayonne and Cette. W h e n they shall leave the warehouse, to be transported to a foreign country then they shall enjoy exemption from all import and export duties, even those appertaining to the revenue collectors of the western domain, with reservation of the three per cent to which they shall be subject. 9

Article 16 of the edict required the delivery of consular certificates to prove that the goods had been properly delivered to the foreign country designated, w i t h a penalty of four times the duty for non-compliance. As long as the chartered company held the exclusive privilege of providing all French merchandise for the colonists, i t merely paid a specified sum out of its income to the government of France, or, alternatively, paid all the ordinary 10

THE FRENCH REGIME

13

costs of administering the colony. When the trade of the colony was liberalized, however, and the duties farmed, the merchants paid the import duties to the farmer of the revenue out of their profits. The Sovereign Council11 which sat at Quebec arbitrarily set prices and profit levels high enough to ensure that the extraction of the import duties would be relatively painless to the merchants, but they still objected that a mark-up of 65 per cent was insufficient. The masters and pilots of the shipping on the St. Lawrence were required to furnish minute details as to their cargoes, their source, and their destination, and the prices to be charged.12 An occurrence of importance to tariff technology was recorded in 1670. The colonists had protested that the merchants had been taking advantage of the 10 per cent import duty on dry goods, that is, dutiable merchandise other than liquors, to enhance the price to the consumer illegally. Employing a customstariff technique to meet the situation, the Council removed the duty, shifting the burden to liquors and tobacco. At the same time it required that merchants provide certified invoices covering their importations from France, and that they sell at the fixed price, on pain of confiscation and fine.13 It was from the export duties on furs that most of the revenue came, principally from a levy of 25 per cent ad valorem on beaver skins and 10 per cent on moose skins, and, in addition to these, the total proceeds from the trading at Tadoussac. Since price schedules were fixed, these ad valorem duties were, in effect, specific.14 The logic of including the monopoly of the export trade in furs in the revenue farm becomes apparent; it was a means of attempting to ensure that all dutiable exports would pass through the hands of the revenue collector. On receiving the skins at his stores, the tax farmer collected the duty, paying for the skins at a rate fixed by decree, then usually remitted a lump sum to the government. For that part of the revenue which was expended directly in Canada, the farmer acted as the Crown's financial agent in the colony. Extremely rigorous penalties were directed at the coureurs des bois to discourage the diversion of the fur exports from the tax farmer's stores to the duty-free outlets of the English colonies. The granting of amnesty in 1681 indicates, however, that the government had finally become aware of the futility of imposing regulations which could not be enforced. The problem facing the farmer of the revenue was the presence of alternative markets, reached chiefly through a wilderness which contained no defined customs frontier. The problem facing the government was that of trying to reach out beyond the area of effectual jurisdiction in order to control a geographical area which was already too large for the techniques that could be brought to bear upon it. Shortly after 1700, in the period of financial crisis, the basis of valuation for import duties was changed in an attempt to increase the revenue of the colony. Since 1662 the "money of the country" had been held at a discount of roughly one-third relative to the "money of France" with the object of preventing money, which was scarce in New France, from draining away to the metropolitan area: that is, the official rate of exchange was made to conform to the relationship between official prices in the colony and prices in France. The unfavourable balance of trade persisted, however, and by 1708 no metallic currency remained in Canada. The import duties, which had previously been levied on the basis of the "money of the country," were shifted in 1703 to a "money of France" valuation for duty, increasing the revenue on these items by about one-third.15 One final administrative technique worthy of note was that adopted around

14

CUSTOMS ADMINISTRATION IN CANADA

1750. This was a plan to make the customs duties self-liquidating. One year was permitted in which to pay the duties, in the expectation that the goods would be sold within that period. This technique was intended to have results similar to those achieved by the bonded warehouse. However, in 1754, the government decided to collect the duties on entry of the merchandise, thus receiving two years' revenue in the one year. Administrative manipulations of the kind described, and changes in the tariff schedules, were far overshadowed by inflationary monetary manipulations, especially the issue of card money as a means of meeting the growing deficits in the revenue. However, the customs experience of New France indicates that there is nothing new about many of the administrative techniques used today. It also suggests that as Canada has developed, her economic problems have changed less in character than in degree.

CHAPTER THREE

CUSTOMS ADMINISTRATION UNDER BRITISH D O M I N I O N COLLECTING REVENUE in North America after the fall of Quebec presented the British with formidable problems. They had to apply to their new territories a defective administrative technique, and they had to apply it in the face of a hostile public attitude and an unfavourable geographical situation. Through centuries of evolution English customs administration had become so incredibly complicated that even the extensive reforms and consolidations which took place later, in 1787, failed to make it effective. For example, the fee system was out of hand; ancient sinecures were still occupied; and the customs accounts were hopelessly muddled.1 Even apart from such weaknesses of organization, the prevailing attitude in Britain towards the duties of customs might well have prevented adequate enforcement of the laws.2 This attitude arose in large part from administrative vexations, which provided the subject for pamphlet attacks throughout much of the eighteenth and early nineteenth centuries. Sir Matthew Decker, in proposing a single tax on tea consumers to replace all the duties on tea, summed up the situation as follows: "Consider, First, the Evils it aims to prevent; such as Frauds and Collusions, in running of Goods: vexatious searching of Ships and Warehouses, a numerous Band of Officers, who are a great Charge and Burthen upon the Publick; frequent frivolous and vexatious Law Suits; and above all, Equivocations with Oaths, or downright Perjuries."3 It is reported that the colonial customs accounts were so confused that they seldom passed in the Exchequer. In one year after 1760 the charges for management of the colonial service absorbed all the revenues of the plantations except about ¿£4.4 The northern colonies of North America were serious liabilities in this respect. In the year 1784 Nova Scotia showed a net balance of £37, while Quebec reported a deficit of £311.5 Since the revenue returns did not ordinarily show the fees received by the customs officers, or the "gratuities" which they were allegedly accustomed to extort, the actual amount collected was likely to be something of a mystery. The indulgent attitude of the British authorities towards the state of the colonial revenues can be explained on several grounds. Lack of imaginative statesmanship in colonial affairs up to the time of Huskisson was partially responsible. Also, military and political problems in Canada tended to overshadow the fiscal question for many years. But the principal cause was a more economically rational one. The customs officials, in the performance of their duties, were carrying out a broader economic function than the mere collection of the revenue. Their main object was to enforce the laws of trade and navigation, and the collection of the customs was only subsidiary.6 Hence the customs revenues of the colonies went to defray the cost of policing colonial commerce: the colonies were paying for their own embarrassment. It has been stated that the British customs in fact supported the navy, and "such as pass on the seas upon their lawful occasions/'7 The customs duties under such conditions, while nominally intended for revenue, had a broad, trade-

16

CUSTOMS ADMINISTRATION IN CANADA

regulating function of a kind usually associated with a much later stage of tariff making. The customs administration of England had evolved largely upon a basis of maritime commerce. The difficulties of applying this system to colonies with a coastline such as that of Nova Scotia were serious enough; but with the rise of an independent economy in the United States, and the extension of the frontier westward, it was not long before it was called upon to administer, as well, inland customs boundaries over a vast and poorly defined continental area. It is scarcely surprising that it should exhibit strain under such a burden, or that there was a strong temptation to avoid the implications of the problem by ignoring its existence. When it could no longer be ignored, control was attempted by regulations which showed both indifference to, and ignorance of, the economic and geographical realities of the situation. It was undoubtedly with relief that the British finally bequeathed the problem to local colonial authorities. Peel's budget of 1846 constituted "the British Declaration of Independence."8 The difficulties attending customs administration in Canada must have given support to a Benthamite view of colonial possessions, for although broad political and economic doctrine no doubt had much to do with the adoption of free trade by Britain, it was also the result of a national policy based on empiricism. A study of the field of customs administration suggests that the possibility of destroying an institution which had become an encumbrance provided a strong incentive. The first tariff designed especially for the new British province of Quebec was instituted in 1765. Its object was simply to provide revenue to meet the growing expenses of government. In addition to the duties on spirits, it retained the old French 3 per cent levy on imports and exports of dry goods, despite the protests of the colonists. Of greater significance, however, are the duties of the Quebec Revenue Act of 1774. These were differential duties aimed at the establishment of a triangular trade between Britain, the West Indies, and the Canadian colonies, to replace the trade lost through the revolt of the American colonies. The duties ranged from 3d. per gallon on spirits from Britain to Is. per gallon on plantation spirits imported from foreign countries. "British" spirits consisted largely of West Indian rum, which suggests the direction in which trade was to flow around the Atlantic. To complete the triangle, Quebec and the Atlantic colonies were to supply the West Indies with timber and food supplies, but as it turned out, they were unable to meet the demands of this trade. The administrative problem involved was a difficult one for the techniques at hand. A multilinear tariff, even one as simple as that of the Quebec Revenue Act, is discriminatory and may be difficult and costly to police. By making rum, a vital raw material of the fur trading industry, more costly in the Canadian colonies than in the United States, the Act immediately drew attention to the possibilities of the open frontier and afforded a foretaste of administrative difficulties which were later to be of great importance. Apart from the enactment of prohibitive regulations, however, no attempt was made to give practical effect to the British desire to restrain the illicit rum trade. The Quebec Ordinance (28 Geo. Ill, c. 1) of 1788 did give some legal recognition to the commercial intercourse between Canada and the United States, and led to the establishment of the first custom house in the interior, at St. John's on Lake Champlain, as an outport of Quebec. This ordinance was the result of an attempt by

UNDER BRITISH DOMINION

17

Dorchester to regularize a frontier trade between Vermont and Canada, largely in natural products. Rum was of course excluded. The "Treaty of Amity and Commerce between Britain and the United States" (Jay's Treaty) of 1794 opened legitimate trade across the internal frontier further, and posed new administrative problems, especially for Upper Canada, as it resulted in the setting up of a customs establishment in that province in 1801 (41 Geo. Ill, c. 5, U.C.). The adequacy of British mercantilist techniques for coping with trade by sea made the administrative problem posed for sea-coast and river ports by the Quebec Revenue Act less trying and principally involved more documentation, more rigorous examination with respect to the origin of merchandise, and heavier custom house fees than in the interior. Here as well, however, price differentials provided an invitation to the smuggler. It may be doubted that the British Treasury's congratulations to the Surveyor of the northern district upon his successful efforts against smuggling in the area of Canada were really warranted.9 The Declaratory Act of 1778 (18 Geo. Ill, c. 12, Imp.), a result of the American Revolution, was intended to reassure the remaining colonies that revenues collected in the colonies would be applied to their administration, and not used by England for other purposes. It was, however, by no means a surrender of Westminster's fiscal authority, and legislative assemblies that attempted to so interpret it, as did Nova Scotia's, were likely to be disappointed. Both the collection and the appropriation of the revenue were Crown prerogatives, and finance was one of the last fields invaded by autonomy. In general, provincial control of the customs tariff was achieved by experimentation. The colonies simply began to make their own tariffs; if the British government did not reject them, then they stood. A vague uncertainty as to the provinces' true powers persisted until the famous Gait retort of 1859 finally cleared the air. The British Treasury, however, was more direct in its approach. The officers of the customs were Imperial officials and remained so until 1850. No opinion to the contrary was entertained by the Commissioners. The system applied to the American provinces had apparently been marked by wide swings between laxity and stringency, but after the American Revolution much stricter attention was given to the collection of the customs in the remaining colonies. In an attempt to increase efficiency several colonial officers who had been enjoying leave in England were ordered to place themselves under the instruction of "those eminently unpractical gentlemen, the patent officers of the Port of London."10 Higher colonial officials were required to furnish the Commissioners with full reports respecting the character and capabilities of their subordinates, and also with complete trade statistics so that the Commissioners could render quarterly abstracts to the Treasury. It was also decided that all newly appointed officers should undergo a course of instruction in the Port of London prior to taking up their duties. Whenever a colonial collector was dismissed for misconduct, his crimes were recited to his successor before he left England by the Controller General, with a caution against repeating them.

18

CUSTOMS ADMINISTRATION IN CANADA THE CUSTOMS ADMINISTRATION IN THE STRUGGLE FOR RESPONSIBLE GOVERNMENT

The struggles in British North America for responsible government and for control over the customs were not unrelated and followed substantially parallel courses. The more fundamental constitutional conflict took the overt form of a conflict for control of the revenue, reflected in persistent attempts by provincial legislative assemblies to gain control of the administration of the customs. The statement, specific to Britain, that "any true history of the Customs is essentially an obituary notice of Prerogative,''11 within a somewhat different context, has been equally true of the North American Provinces. The constitutional struggle in England had been, of course, against the prerogative of the King. In North America it was a struggle against the prerogative of Westminster in colonial affairs. The Imperial Collector of Customs was the symbol of this prerogative. Before victory, it was essential that the civil list come under colonial legislative control, and that the King's Customer become the servant of the people of Canada, and no longer their master. Where the revenue depended so completely on the duties of the customs, this preoccupation with the person and office of the Collector is not surprising. Duties, as opposed to taxes, have been a favoured source of revenue until a relatively late period in the history of public finance, the main reason probably being the supposed relative ease of their administration.12 It is easier, presumably, to maintain a physical control over goods than it is to exercise surveillance over the activities of persons. Elaborate accounting methods are not required, and such forms of impost can be fairly effectively administered under rather primitive forms of commercial organization. In addition to these advantages, there was, in Canada, the fact that the French were opposed to direct forms of taxation. Such casual revenues as the British took over from the French régime were at best but casually paid, and British policy precluded attempts to force the collection of this type of revenue. The result was the fostering of the idea that it no longer formed a part of the provincial revenues, and this led to a heavy administrative reliance on customs duties. After 1791 Upper and Lower Canada had special problems of customs administration which extended beyond a mere battle of the custom house, and these will be examined presently. The problem in the Maritimes revolved more directly around a fight for provincial control of the customs, and consequently the lines of the controversy are somewhat more clearly drawn in those provinces. In all the colonies, however, the principal point of attack before 1826 was the fee system. When this system was swept away in that year, the struggle shifted to the control of patronage, and of the salaries of the customs officials. These were not the only bases of complaint, however. As early as 1758 the first Nova Scotia assembly declared that "collectors of the impost and excise duties are, by the gout and other infirmities of body rendered incapable."13 The Collector for New Brunswick was reported to be seventy-six years of age, and it was suggested that he did not bear his years gracefully. In any case, the Collector of His Majesty's Customs, as the symbol of colonial subjugation, provided the necessary body to be kicked and soul to be damned. The body was, on occasion, quite literally kicked. The American colonies possibly excepted, New Brunswick appears to have provided the least healthy environment for the strict application of the customs law. Around 1822 several officers

19

UNDER BRITISH DOMINION

were assaulted i n the performance of their duty, and had to call upon the military for protection. I t was found that most of the local "peace officers" had aided i n the assaults. I n 1827 an officer i n that province was attacked by a merchant, who accused h i m of being dilatory i n the clearing of his merchandise and removed i t forcibly from his possession. Still another New Brunswick of­ ficial was menaced w i t h a loaded gun i n 1847. There is little question but that the fee system laid a heavy burden upon commercial traders, and i t offered a sure target for militant legislative assemblies, aided and abetted by a shrewd merchant class which readily saw where its advantage lay. The Legislative Assembly of Nova Scotia i n 1775 requested of the Treasury, "that you w i l l appoint good and sufficient salaries to the officers of the Customs and absolutely forbid them to take any fee, i n any case what­ soever as we have found, that the detail of Revenue duty, in all its departments, have been clogged w i t h unnecessary forms and trifling regulations, to increase fees and perquisites of the officers." Dorchester supported this view i n the same year: 14

It is a misfortune attending the King's Service in this part of the world, that the inferior officers of government, proud of the superior Weight and influence of the Boards, from whence their commissions issue, and relying for protection upon their correspondents on the spot, almost lose every idea of that subordination so essential to good order; these gentlemen, tho' it is their particular duty, as the King's servants, to support his Government, and the measures of administration, are for the most part cold, and at best neutral, even where the most im­ portant interests of Great Britain are in question, too many of them are greedy enough for gain, and warm in the cause of fees, perquisites, and presents, they provoke the murmurs of the people by an uncontrolled rapine, and then clamour or encourage every sort of opposition to whoever attempts to curb their voracious appetite.

He then asked that the Commissioners of the Treasury settle the matter of fees by replacing them by adequate salaries, "as may enable them to live suitably to their respective stations, that they be not tempted to exert their wits i n the extension of their emoluments, i n a manner neither creditable to themselves nor beneficial to the p u b l i c . " These requests were not granted. The movement for reform had not yet reached significant proportions i n England, and the Treasury saw no reason to make special concessions to the colonies while the old system was still i n force at home. Nevertheless, the assault continued. I n 1817 the merchants of Nova Scotia asked for the removal of exorbitant fees, and a petition of 1820 stated: "We must haul up our vessels for the Customs House under its present impositions are the only persons that make anything by t h e m . . . . " Another complained: " . . . the Custom House fees i n this province are so extremely high and dispropor­ tionate to the labour and trouble of the o f f i c e r . . . . " Customs officials were generally contemptuous of the legislative assemblies' attempts to control them, and even the governors seemed able to exert little influence, on the rather rare occasions when they supported the assemblies. The officers of higher rank usually associated themselves w i t h the legislative councils. When hard pressed, they might admit that custom house practice was very loose, and might go so far as to state that they themselves disliked the fee system, which "fluctuates every year, and rests altogether on the uncertainty of commercial speculation." As a rule, however, they were inclined to fall back on the civil servant's time-honoured dictum that they did not make the law, but merely carried out its provisions. The higher ranking officers of the customs all received fees, but sometimes 15

16

17

20

CUSTOMS ADMINISTRATION IN CANADA

they received a basic salary as well. The fee schedule was determined in England. But even in England the fee schedule was apparently not adhered to. In Canada fees charged were usually about 60 per cent higher than the fee tables allowed. The provincial act of Upper Canada (41 Geo. Ill, c. 5, 1801), which authorized the first custom houses in that province, provided that the collectors of the eleven new ports of entry would receive a salary of ¿£50 per annum. The fee table was to be posted in a conspicuous place in the custom house, and the act allowed a penalty of £50, payable to the aggrieved party, for receiving a fee higher than those of the table, which was as follows. Permits to unload merchandise: From vessels of under 5 tons From vessels of 5 tons and up From vessels of 50 tons and up From wagons, carts and sleighs Entries: By water By wagon, cart or sleigh Certificate showing duty paid Bond for payment of duty

Is. 3d. 2s. 6d. 10s. 4d. Is. 3d. 6d. 6d. 2s. 6d.

These fees must be considered moderate when compared with the charges that were apparently made against sea-going vessels travelling between Britain and the colonies. According to Atton and Holland,18 the entry and clearance fees chargeable on a vessel, even without any special transactions, were at one time as follows: To the collector To the controller To other officers

£ 8 5s. lOd. 2 15 3 16 27

1

1

Fees consisted generally of charges to merchants and masters for each document provided, and the principal documents were the following: general entry, general clearance, dockets, bonds, certificates, and registers. Obviously a fee system of this type would provide little incentive for any reduction in the formalities of administration. Carleton's estimate was that during General Murray's administration in Canada the fees of office amounted to £4,415 (in addition, presumably, to the British Treasury's allowance for salaries of £3,650 per annum), while the total expenditures of the Receiver General were £6,230. Murray drew on the British Treasury for the balance.19 It was estimated that during the years 1775-91, under the provisions of the Quebec Revenue Act, revenue was £94,762, the amount paid to the Receiver General, £83,388, giving a cost of collection of 12 per cent. This is undoubtedly a low estimate, as fees were obviously not reported in the revenue. An estimate including probable fees, for the last five years during which the fee system was operative (1820-5), indicates that for every pound of revenue which found its way to the Treasury the total cost of collection might have been as high as eight pounds. On occasion the Treasury did attempt to impose disciplinary measures. There were complaints that the New Brunswick Collector had been charging extortionate fees between 1817 and 1824. He was censured by the Treasury and ordered to pay costs of £250. He continued to thrive, apparently, by then authorizing the preventive officers to collect enormous fees, taking half of them

UNDER BRITISH DOMINION

21

for himself.20 The practice at Halifax was for the Collector of that port to take half the fees received at outports attached to it, and to give one third of this share to the Controller.21 During much of the early nineteenth century England had been seeking a new colonial policy. Huskisson was convinced that the American Revolution had been "the inevitable child of the restrictions on the colonies/'22 and his influence led to the breakdown of the formal mercantilist system, and to a transitional state between mercantilism and colonial autonomy. In 1821 a commission recommended a change in the system, as it was found that all the colonies had been making increasingly strong complaints, and in 1826 the customs fees were abolished. This was a victory for the legislative assemblies and the merchants, but is was not the complete victory that had been sought and expected in some quarters. Fiscal authority remained in Britain, and control of custom house salaries stayed with the Treasury, along with the patronage. It should be noted that in this controversy over fees, accusations were not all on one side. The maligned officials often charged their detractors with favouring the contraband trade. Attempts by colonial assemblies to obtain restraining orders on the customs officers do not necessarily prove that these officers systematically abused their powers, although they may indicate accurately enough that the system itself was bad. The assemblies would naturally take advantage of any derelictions of duty on the part of the King's Customer to assert themselves in the constitutional struggle. In this matter of the customs fee system, it is possible that the evidence for the prosecution has survived the evidence for the defence. Following the abolition of the fee system, collectors were empowered to retain sufficient revenue from their collections to pay the salaries and other expenses of the service. Provincial legislative assemblies objected to this practice, claiming that several of the acts of the Imperial government, especially the Constitutional Act of 1791 and the acts of 1822, had stated explicitly enough that the product of the customs revenue should be handed over to colonial treasuries whenever there existed a local legislative body. The decision finally turned on whether "revenue" should be interpreted as "gross" or "net." The Treasury won. The constitutional struggle then centred upon the control of the civil list, and it was resolved in the colonies' favour only by the adoption in Britain of Huskisson's new policies, and by the subsequent change in the ratio of provincial revenues to Imperial duties. When the revenues from local acts became sufficient to support the colonial administrations, the local legislatures had the power they needed to exert authority over their collection. This situation developed over a fairly long period, and in a somewhat halting manner, which was chiefly the result of differences in the attitudes of different British governments respecting the place of the provinces in the Imperial scheme. As the costs of administration of the colonies increased, the old Quebec Revenue Act of 1774 was supplemented by provincial revenue acts which followed one another rather rapidly, with the indulgent acquiescence of Great Britain, which was primarily interested in the tariff as a regulator of trade. Lower Canada, for example, passed eight such acts between 1791 and 1819.23 The Crown duties became less and less adequate as sources of revenue, and the former situation then began to reverse itself. Where, before, Imperial officers collected the provincial duties along with the Crown duties, now provincial officers began collecting the rapidly diminishing proportions of the duties which were reserved

22

CUSTOMS ADMINISTRATION IN CANADA

for the Crown. This was a transient situation, however, for by the time the provincial authorities had obtained control of the customs administration, the old Imperial duties and restrictions were already being swept away. In 1829 the Assembly of New Brunswick received a proposal from the British government that the province pay the custom house salaries as part of a scheme for settlement of the fiscal question. Although it reconsidered later, it at first refused: The House of Assembly are the sole constitutional judges of the proper compensation to be offered public officers when their salaries are to arise from taxation within the province, and although the House is well satisfied of the necessity of making proper provision for the officers of the Customs, . . . yet they feel bound to say that the scale now proposed is far beyond what the circumstances of the country will admit.24

The Assembly of Lower Canada declared that it could not be expected to vote moneys from its own revenues to pay deficiencies between the Crown revenues and the total expenditures unless it could examine the Crown revenues to see that the deficiency existed. It thus laid claim to all revenues raised in the province. The British government, and the colonial governors for the most part, still insisted upon the Crown's prerogative. The fact that the Receiver General of Lower Canada, John Caldwell, went bankrupt in 1823 did little to strengthen the position of the British, however, and it led to the appointment of an Auditor General and an Inspector General for the better control of this office.25 When, in 1831, the British government offered to surrender control of all Crown revenues to Lower Canada in return for a permanent civil list of £19,500, the Assembly refused. Upper Canada however accepted this offer, with a civil list of £10,800 in exchange for that province's share of Crown duties amounting to «£11,500. The Lower Canada problem remained unsolved. Finally, in 1838, with the suspension of the Constitutional Act of 1791, the Governor was placed in control of the revenues. All the colonial legislatures were making strong efforts in this period to hold all revenues for their own disposition. In 1828 the Assembly of Nova Scotia adopted a resolution to hold the officers of the customs personally responsible and accountable for moneys retained for salaries and expenses. After a delay of two years this resolution received royal assent, and an annual sum of £6,430 was voted out of the receipts from the Imperial revenues by the British government for the expenses of the customs establishment. The Assembly of New Brunswick, having reconsidered the British proposal of 1829, concluded a similar agreement in 1835. One final obstacle to the provincial assemblies' control of the civil offices remained. The patronage of the customs was still in the hands of the Imperial authorities, and twenty more years were required to effect its transfer to the local legislatures. In 1836 the Assembly of Nova Scotia complained: "Your Majesty's subjects in this province are studiously overlooked, in the selections to fill places, however inferior and subordinate, in the department of Your Majesty's Customs . . . notwithstanding they so amply support the same."26 The Colonial Secretary coolly replied that the Lords Commissioners of the Treasury made all appointments, and that even the Governor could only temporarily fill vacancies. "It is so very desirable that all particular and local influence should be avoided."27 Customs officials were, for the most part, strongly opposed to any change

UNDER BRITISH DOMINION

23

in the system of patronage, suspecting, possibly with reason, that local control over their activities could scarcely be to their advantage. There appear to have been exceptions to this general attitude, however. An anonymous letter to the Lords of the Treasury charged the Collector and Controller of Customs at the port of Montreal with pushing forward the supposedly imminent transference of the customs patronage to the colonial authorities, in order that they might recommend their own nominees, who were brother Odd Fellows. It stated that in the spring rush merchants were obstructed by the dilatoriness and circumlocution practised by the officers concerned. The officers denied these charges and produced a testimonial respecting their capacity and alertness, signed by many Montreal merchants.28 There were other complaints less directly related to the patronage issue. A dismissed customs clerk of Quebec wrote the Montreal Settler in 1834 to the effect that the Quebec Collector and the Montreal Acting Collector had obtained promotion from the Treasury by arranging for the undermanning of the Canadian customs. That this allegation was prompted by altruistic motives may be doubted. The Board of Customs also received anonymous letters accusing the Quebec Collector of soliciting influence in his own interest.29 The Huskisson reforms of 1822 and later, through the repeal of a long list of regulatory acts, altered in important respects the nature of the duties of the Crown collectors in the colonies. The new commercial policy for the colonies substituted Imperial tariffs of the preferential type for the prohibitions of the old acts, and the collectors became less concerned with the oversight of the Navigation Acts and more concerned with the collection of the customs revenue. As the Navigation Acts continued to dwindle in importance through successive acts of repeal, and locally authorized revenue duties increased in significance, the position of the British Treasury became more and more untenable. This seems to have been finally recognized, for a ruling of 1835 by Glenelg, the Colonial Secretary, in the case of Jessup, the redoubtable Collector of Quebec, who had refused to provide a report to the legislative Assembly of vessels entered at that port, indicates that the British government was beginning to lose interest in the Crown's prerogative in colonial customs matters. Glenelg declared that a customs officer's duties were ministerial, and that he should therefore answer questions put by the Assembly and furnish the documents required.30 Even the Board of Customs, comprising the resident commissioners, which had been appointed to exercise the rights of decision in colonial appeals, apeared to be losing its power. Appeals directed to it began to be redirected to the British Treasury itself. The channels of official communication and of authority were becoming confused, the result of the destruction of the old mercantilist system and the lack of a new, well-defined one to take its place. Finally, with the passing of the enabling act of 1846 (9-10 Viet., c. 91,. Imp.), the colonial legislatures were given the power to sweep away all the duties of the Possessions Acts. Britain had declared herself for free trade, and had "abdicated from the colonies," as far as the direct control of their commerce was concerned. Imperial officers of the customs had been rendered largely redundant. The Lieutenant Governor of Nova Scotia offered the following opinion: "... the effect of the Law will be to render the customs establishment unnecessary as far as the collection of duties is concerned, and to withdraw the principal source from which the payment of the Establishment is derived."31 The re-enactment by the legislative assemblies of most of the Imperial acts

24

CUSTOMS ADMINISTRATION IN CANADA

affecting the customs merely added emphasis to the changed situation. Fiscal power had passed into the hands of the provinces, and with it most of the patronage of the customs.32 These three phases of the battle of the custom house, when viewed in conjunction with events of constitutional significance which took place in the provinces, suggest the important role played by the customs administration in the struggle for responsible government in British North America. From this time until the final repeal of the Navigation Acts Imperial officers, under the title of "Controllers of the Navigation Laws," continued to be stationed in the provinces, but their duties were largely clerical and statistical, being concerned with the registry of vessels, the provision of returns to Britain respecting navigation and trade, the oversight of certificates of origin in the case of importations of commodities, and similar matters. The completeness of the separation is illustrated by the fact that when the government of Nova Scotia, in an attempt to economize, tried to appoint the Controller of the Navigation Laws to the office of part-time Collector of the Customs at a salary of «£300 per year, the British Treasury declined to ratify the appointment. Some of the former Imperial customs officials were retained in the employment of the provincial customs. Those not retained were pensioned by the British government. With the end of the Navigation Acts, the duties of the controllers, with modifications to meet the requirements of the provinces, were handed over to the local customs departments. By 1855 the last vestige of British influence on the customs administration of Canada had disappeared. ADMINISTRATIVE CONFUSION It was to be expected that the dual system of duties described above would create confusion and complexity in custom house procedure at some point in this period of change. Referring particularly to the Imperial duties collected under the old Quebec Revenue Act of 1774, Robert Gourlay reported in 1822: The duties thus collected, to the amount of the sums specified in the above stated act of the British Parliament, being distinguished from the residue, are considered as belonging to His Majesty, and not to the province, and are accounted for accordingly, upon the principle that they are levied under and by virtue of that act, although their collection is provided for by a provincial act. But some gentlemen in the province are of a different opinion, and have contended that they ought to be considered as levied by provincial authority, and belonging to the province.33

The confusion that existed at the administrative level is suggested by the following statement of the Commission of Enquiry into the Public Departments of Canada of 1839: "Collectors are constantly led astray by the differences that exist between the Imperial and Provincial Acts regulating the Customs. The Provincial enactment prevails so far as it may not be repealed or superseded by the provisions of the Imperial Act."34 For the most part, the Imperial government and the provinces levied duties upon different classes of goods, since their objectives were different, but on spirits, which had always been a favourite item of early tariff makers, there was a duplication of duties. In keeping with the British attitude toward the tariff, and in order to avoid double taxation upon such commodities, it was ruled that, where the provincial duty was higher than the Imperial, the provincial duty only was to be collected; where the Imperial duty was the highe^

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the provincial duty was to be collected on behalf of the local government, and the difference on behalf of the Imperial. As an exception, rum bore an Imperial duty of 6d. per gallon in addition to any colonial duties applicable. The customs authorities did not escape criticism for their method of handling the complexities created by this dual tariff. The Board of Trade of Montreal, always alert in the interest of the merchants, stated in 1834: "If there be any place requiring a Customs Consolidation Act, it is in the Province of Lower Canada. To the complicated nature of our Duties, every merchant in the town will bear testimony, and if this is insufficient, let the forms of Entries which are now published stand on record as evidence of the fact."35 The board found no fault with the application of the duty on spirits, which was a straight specific duty on the gallon. The wine duties, however, were differential duties, originally designed to provide such preference as would maintain the channels of trade between Britain and the colony. There was also the problem of currency exchange, since Crown duties were collectible in sterling, and the fluctuating premiums at which it passed in the colonies made calculation necessary in the completion of customs entries.36 It was claimed that the wine duties were unnecessarily troublesome, both to merchants and to customs officers. From importations stretching over three years of less than 6,000 tuns, only £1,000 had been received in net revenue from the 10s. Crown duty on wines after provincial duties had been deducted. It was recommended that it be dispensed with, as not worth the expense of collection. The duty on wines from the place of growth was somewhat more significant. It was a "protective"37 duty rather than a "revenue" duty, and amounted to an average of 6d. per gallon. The Board suggested that entries would be materially facilitated and simplified if it were changed into such a uniform specific duty. There was a further Crown duty of 7±d. per cent, which was, however, not applicable when it was less than the previous duties. It applied therefore only to wines of a very high price such as seldom came to the colony. "The revenue and the protection also which it affords, must be next to nothing, hence its only effect is to give all parties trouble and to increase the expenses of collection." In addition to these, there was an impost of £7 7s. per tun on wines from Great Britain in foreign bottles. "We are ignorant of the object of this duty, unless it be an additional protection to the English glass manufacturer. If such be the object, and if it be deemed desirable to continue it, let an additional duty of 6d. be levied in its place: that is, converting the previous Crown duty of 6d. into Is. on wines in foreign bottles." The wine imported in bottles annually amounted to less than 30 tuns, yielding a duty of less than £220. There seemed to be little object in retaining this duty, since the glass manufacturer in Britain had already a direct protection of Is. per dozen. The board concluded: "By thus simplifying the duties on wines, let the reader look at our forms of entries and observe how many deductions, additions, and calculations would be spared." In addition to these various Imperial duties, the provincial duties still had to be levied. These were in the amounts of 2d., Id. and 3d., as provided by 33, 35, and 55 Geo. Ill (L.C.). They were calculated separately, requiring three lines of figures, three terms of payment, and three bonds to be filled out and signed. It was recommended that these be consolidated into a single duty of 6d., payable as one bond "at the average of the credit now given." This last phrase refers to the fact that under the provincial acts the importer could ob-

26

CUSTOMS ADMINISTRATION IN CANADA

tain credit, in the case of 33 and 35 Geo. Ill, for four months, and in the case of 55 Geo. Ill, for eight months, if he could provide bonds. This is reminiscent of the self-liquidating French duties which have been previously examined. A typical entry for higher grade wines, under the complex system then in force, had the following appearance: In foreign bottles 10 cases Madeira 50 doz. 120 gal. @10s/tun a d d 2/13 * Less 3% 3 gal. 117 gal. @4d @2d @3d

£

s

d

0 4 9 0 0 9 1 19 0 0 19 6 1 9 3

s d

£

0 5 6

4 7

9

Value per declaration £,75 Os add 1-10 f 7 10

120 gal. per £7 7s/tun 50 doz. bottles per Is Less previous duties

82 10 @7i%

6 3 9 3 10 0 2 10 0 12 3 9 4 3 9

Less 1/10 î

8 0 0 0 16 0

A d d 2/13 *

7 4 0 1 2 1

8

6

1

12 19 4

* Exchange. t As a means of overcoming possible fraudulent invoicing, 10 per cent was added to declared values—an invitation to undervalue by 10 per cent (6 Geo. IV, c. 114, Imp. 1825). J Foreign goods imported via the United Kingdom enjoyed a preference of 10 per cent of the general rates (6 Geo. IV, c. 114, Imp. 1825).

If this reasoned appeal of the Board of Trade achieved results, they were very slow in coming. Twelve years later, in 1846, Lord Cathcart was urging the inconvenience of the dual tariff on imports into Canada, and arguing that its consolidation into a single tariff under the control of the Canadian legislature would simplify trade, and also gratify the Canadian Parliament. Britain acquiesced only after she had ceased to care about tariffs.38 SMUGGLING IN BRITISH NORTH AMERICA There are many types of fraud which may be perpetrated against the customs revenue, all of which probably fall within the definition of smuggling. There appears to be no necessity for confining the word "smuggler" to a meaning that calls to mind the swashbuckling type of adventurer who runs contraband goods across the frontier. It might as reasonably apply to those prosaic persons, importers, exporters, clerks, public carriers, and tourists, who attempt to evade the customs laws in any manner, by rendering false invoices, attestations, or declarations, respecting goods subject to duty. The smuggler, in the specialized sense referred to above, merely employs one variety of fraud. He attempts to avoid

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all possible embarrassment by entirely avoiding the customs official. Unless he is armed to the teeth, however, and contemplates physical assaults upon the officers of the customs, his actions appear to be no more reprehensible than those, for example, of the subject of the following poetical comment: She hailed America, declared her pride, Her love; declared our flag should never fall. Declared for this our fathers fitly died— But, disembarking, scarce declared at all.39

Custom and usage have decreed, however, that the term smuggling carry this narrower meaning, and that it be associated with, but distinct from, fraudulent entry. This distinction has been officially recognized in the United States, where smuggling is defined as: "the act or attempted act with intent to defraud the government of bringing into a country dutiable articles without passing the same through the custom house or submitting them to the officers of the revenue for examination."40 In the Canadian Customs Act the distinction is made by treating "smuggling," "false invoicing," and "evading value" under separate subsections of section 203.41 The distinction is not of outstanding importance, but it makes it reasonable to confine this section to the study of those activities in the pre-Confederation period which were associated with the clandestine introduction of dutiable goods into British North America. The smuggler is the most romantic and spectacular figure in customs-tariff history, and English literature and song owe much to this redoubtable champion of free trade. Economic literature too has had much to say of him. It seems wise, however, to approach the arithmetic of smuggling with some reserve in this survey. For obvious reasons, there are likely to be no reliable statistics of smuggling42 and one can only guess at the extent of the depredations of the smuggler, who, being essentially modest and retiring, cannot be expected to come forward to correct errors in the estimates. It would be dangerous, therefore, to accept unreservedly mere opinion as to the amount of smuggling as an accurate measure of the effectiveness of customs administration. Nevertheless, the responsible nature of many of the sources of opinion suggests that it would be unwise to neglect the smuggler in any treatment of this period of tariff evolution. It is clear that there have been many persons associated with the trade of Canada who would have subscribed to Charles Lamb's opinion of the revenue, as "an abstraction I never greatly cared about." It is equally clear that despite the opinion expressed by De Tocqueville that Americans had too much respect for the law to engage in smuggling,43 customs officials and preventive officers in the United States have also been impressed with the fact that "a policeman's lot is not a happy one." It is necessary, then, to attempt to indicate the importance of the institution of smuggling to the earlier customs administration of the North American Colonies, from such evidence as is available; always subject to the appropriate reservations. The following passage from Adam Smith is often quoted: "When the diminution of the revenue is the effect of the encouragement given to smuggling it may perhaps be remedied in two ways; either by diminishing the temptation to smuggle, or by increasing the difficulty of smuggling. The temptation to smuggle can be diminished only by the lowering of the tax and the difficulty of smuggling can be increased only by establishing that system of administration

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CUSTOMS ADMINISTRATION IN CANADA

which is most proper for preventing it."44 If there are other ways, Smith must have considered them beneath the notice of economic man. As Robert Gourlay cynically remarked in 1822, "There is no more hope in the end of smuggling than in the beginning of preaching."45 Since it has already been shown in this study that contraband trade may be encouraged by the existence of troublesome administrative regulations, even in the absence of any duty requirement, Smith's statement can be accepted only with qualification. An examination of the period under discussion shows the smuggler to have been not so much a depredator of the revenue as a wrecker of the channels of trade prescribed by the mercantilist prohibitions against trade with foreign countries and by later protective policy. But whether there is actual loss to the revenue or not, the existence of the smuggler leads to increased costs of administration by making elaborate and expensive preventive machinery necessary. The nature of Canada's customs frontiers has increased this cost, and the burdens thus placed upon the administration have undoubtedly resulted in an imperfect control over smuggling. Some reference has been made to the illicit trade which was carried on during the French régime with the English colonies to the south.46 There was also much smuggling along the northern Atlantic coast, especially between Cape Breton and Minas Basin. Around 1730 the British complained that French vessels were bringing. "Wine, Brandy and Linnings which they can afford Four pence and Six pence in a yard cheaper than our Traders can Possibly doe."47 Similar complaints came from the Canso area in 1743: "At a moderate computation they yearly carry from Lewisburg 6000 Hhds. of Rum Muasses, besides the Brandy etc. few or none paying any Duty, even for the Rum and Muasses but run their Cargoes in some Port or other of his Majesties Plantations."48 The English experienced no less difficulty after the conquest, and the difficulty was increased after the revolt of the American colonies. The first problem to be faced by the British was the smuggling that took place from the small islands of St. Pierre and Miquelon. European goods flowed from France through these islands into the British colonies. Immediately after 1763 two revenue cutters were commissioned to control this illicit trade, but despite this expensive precaution, the trade continued. Contraband goods were landed in creeks and bays and then often run into the interior as far as the Quebec colony.49 The important place held by the smuggler in the earlier commercial history of the Maritime Provinces has been well treated by G. S. Graham.50 In this period the contraband trade was principally directed, of course, towards the evasion of the navigation laws, and the laws of non-intercourse which were enacted by both Britain and the United States. The problem was therefore not merely one for the customs administration; it was a naval problem as well. In respect to revenue, it was the local colonial governments that suffered most from the contraband trade, and they were anxious to have it curtailed, although they were not enthusiastically supported in this desire by public opinion. The principal difficulty facing both naval and customs authorities was the existence of two treaties respecting fishing rights: one, with France, dated from 1763; the other, with the United States, from 1783. Under the provisions of these treaties, fishing vessels could not be inspected legally, and without inspection no evidence of smuggling could be secured. In the guise of fishing stations, St. Pierre and Miquelon provided smuggling facilities for the French, and Labrador and other parts of the coast afforded a similar service for the

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Americans. Concerning the general difficulties facing the administration, Professor Graham remarks: "In the long run, the task of curbing the contraband trade defied the best efforts of colonial administrators. The legal machinery of prevention existed, but it functioned against the insuperable opposition of geography and human nature."51 There was a notable lack of co-ordination of naval and customs establishments, and this fact suggests that collusion between the smugglers and those whose duty it was to prevent illicit trade would not be difficult. The procedure which was laid down by regulation for the treatment of vessels should be noted. When entering port, the vessel was first entered at the naval office where the naval officer checked its registry and cargo and supposedly made a record of the dutiable commodities therein. The vessel was then entered at customs, where presumably the same procedure was followed, plus the collection of duty. Outward bound vessels were required to clear first at the custom house, and after this the master presented to the naval office the ship's register, the cargo manifest, and the customs clearance. This appears to be administratively sensible, but lack of observance destroyed its effectiveness. For example, in 1790 the custom house officers, under pressure from the Legislative Assembly of Nova Scotia, agreed to give coasting vessels trading to Halifax passports lasting three months for a single fee of 5s. 7^d.52 This concession permitted vessels to evade inspection by the naval officers, and it is recorded that ships actually cleared for European ports, under the pretence of being coasters, without any examination.53 The fact that in both the naval and the customs establishments, the outstations scattered along the coast were out of close contact with their headquarters, rendered inspection difficult and prevented the exposure of dishonesty. The British Treasury did appoint a commission of inquiry to look into the matter in 1785, but it appears that no serious indictments followed. Even where outright collusion did not take place, inertia led to similar results. The American government, interested in discouraging smuggling from the United States to the British colonies, allowed no drawback on American goods shipped there. This regulation was rendered futile by the fact that American customs officers accepted misleading manifests, which stated that the cargoes were for other places. The smuggler co-operated by producing, on return, forged landing certificates, on the strength of which drawback was claimed and paid. "Meanwhile the goods had been run into Nova Scotia or New Brunswick, where the dilatory and inept Plantation officials sat at their desks, charging fees on clearances, entries, etc., fees no doubt gladly paid by the smugglers, and regarded as warrants of impunity/'54 Despite the relatively high emoluments of the colonial customs officials and the heavy expenses incurred by Britain in providing naval stations, war-ships and cruisers, the following estimates of illicit importations into the Maritime colonies were reported: "nearly all the tea; three quarters of the wine; ninetenths of the spirits; seven-eighths of the soap and candles; most of the indigo, starch, mustard, tobacco, and cottons; all the nankeens, sailcloth, cordage, and anchors."55 As has been suggested, it is not easy to measure the extent of smuggling by statistical methods. It may be noted, however, that export and import figures show interesting discrepancies. For example, official export data indicate that in 1787 goods to the value of £34,762 2s. 6d. left Massachusetts for Nova Scotia.

30

CUSTOMS ADMINISTRATION IN CANADA

Official import figures for that province account for only part of these. The difference, £16,471 10s. 7d. would appear, at least in part, to represent contraband.56 A Nova Scotia merchant wrote in 1787: "You can scarce enter a House, but you see an American package."57 Wines and fruits from southern Europe offered special opportunities to the smuggler. When imported through Britain, as required by the navigation laws, they not only had to journey around much of the Atlantic, but also had to pay duty. The United States, however, traded directly with the source of supply, and these commodities were brought illegally into the British possessions. This trade reached such proportions that Britain amended the navigation laws to permit direct trade by the colonies with Spain and Portugal (49 Geo. Ill, c. 116, Imp., 1809). This amendment removed part of the cause of smuggling, but the customs duties remained; and they created a price differential which was often sufficient, notably in the case of wines, to make smuggling still profitable. Moreover, this concession was narrowly circumscribed. The commodities in question could be imported only into certain designated North American ports, and then only in British ships which had first carried fish or other colonial goods to Europe. Elaborate certification and stringent oaths were demanded to prove the origin of the colonial exports; and the master of the vessel had to swear that the several articles, the produce of Europe, had been shipped in return for a cargo of British North American produce previously brought by "such ship or vessel to such port or place in Europe as aforesaid."58 After 1846 control of the contraband trade in the Maritimes was left to the colonial customs administration, and it was called upon to meet the situation with a preventive service which could scarcely match the authority of the British Navy. Considering the enormous difficulties facing the administration, it is not surprising that for this reason alone, tariff authorities in those provinces favoured Adam Smith's first remedy for smuggling, namely, diminishing the temptation by lowering the tax. There were, of course, other reasons in the general economic situation of those provinces which favoured support of lower tariffs. The Maritimes were, in a real economic sense, "New England Outposts," to employ Professor Brebner's term. They approached Confederation with hesitation and misgiving, fearful of the high tariff which they expected would result from assimilation with the tariff of Canada. Their unhappy experience with customs administration makes this fear understandable. The activities of the smuggler on the Atlantic coast again prove that where the conditions for effective administration are not present, statutory enactments fail to restrain the economic rationality of a commercial people. As Professor Graham remarks: If any lesson were to be learned from the story of official efforts to prevent contraband trade, it was the utter futility of stopping the smuggler by legislative action. . . . Proclamations against illicit trading in the ports of the provinces, as well as against conniving and assisting, were regularly passed, and such penalties as forfeiture of ships and cargo were authorized, but they were little more than gestures.59

The interior colonies also had their difficulties with the smuggler. From the administrative standpoint, however, their problem was somewhat different from that of the coastal provinces. The navigation laws did, it is true, affect the administration of the port of Quebec, but except for a brief and confused period after the War of 1812, the administration was spared the necessity of applying them on the Great Lakes.60 For the most part, smuggling was the concern of

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the customs administration, not of the British Navy. On occasion, however, it became a problem for the army. The Montreal Gazette reported on February 17, 1817: "Smuggling has arrived at such a height that parties of the 19th Light Dragoons have been stationed between Laprairie and St. John's, to prevent it. Some time ago Mr. Forsyth, passing Laprairie in the night was challenged three different times to stop, but instead of doing so he drove on with more rapidity; upon which a Dragoon fired and wounded him in the arm."61 It has been noted previously62 that the first important tariff affecting the Canadas, the Quebec Revenue Act of 1774, encouraged the running of rum across the open frontier. From that date to the present, the opportunities for contraband trade across the inland customs line have placed a serious strain upon the administration. As a result of the imprecise wording of Jay's Treaty of 1794, it was quite legal for a number of years to import East Indian products into the inland provinces from the United States, as under Article III goods which were not specifically prohibited from being exported to the inland country from Great Britain could be imported from the United States.64 The Americans spoiled this legal trade by enacting the Nonintercourse Act of 1812, however, and Britain, claiming that the Act had violated the treaty, took the opportunity to forbid any goods being imported by land or inland navigation except the products of the United States.64 Canadians had had a taste of low prices, however, and the trade was hard to stop. The war with the United States put an end to all legal trade and resulted in much administrative confusion, and a great deal of trade was thus placed in the hands of "the less desirable elements of the commercial community." It seems reasonable to suppose that the acquiescent, and even encouraging, attitude of the inhabitants of the Canadas towards smuggling grew partly out of the fact that they resented the British government legislating for a trade whose conditions it did not properly understand, especially after the Canada Trade Act of 1822. Had the provinces been permitted to do more of their own tariff making at an early date, it is probable that the contraband trade would never have reached the proportions it achieved by the 1840's. As soon as smuggling proves to be feasible in one item, it rapidly spreads to others and soon undermines the entire revenue. Canadians were able to see better than distant legislators the difficulties of attempting to administer prohibitive regulations in Canada. Left to themselves, they would probably have met the problem of the contraband trade by a more judicious revenue scheme which would have spread the burden in such a way as to avoid extending taxation to the point at which effective administration becomes difficult and costly. This seems to be borne out by the experience of the Canadas with respect to that most offending imported article, tea. Coffee, sugar, molasses, and rum occasioned similar difficulty, but they were removed from the prohibited list at an earlier date. As settlement extended along the boundary between the provinces of Canada and the United States, and facilities for transportation were improved, intercourse with the United States became easier, and more difficult to control. Then too, in the last years of the eighteenth century, the nature of the trade in the Northwest had changed. Not long before it had been in the hands of a few traders, now it began to take on the aspects of the Canadian trade.65 Much of it, however, was not legitimate. As soon as Upper Canada acceded to the demands of her partner in customs

32

CUSTOMS ADMINISTRATION IN CANADA

union and set up a customs establishment along the Great Lakes in 1801, she began to experience administrative difficulties, as the tariff rested heavily on wines, liquors, tea, coffee, sugar, and tobacco. After 1812, however, trouble began in earnest. The East India Company had enjoyed a complete monopoly in tea within the British Empire, supported by Imperial enactments which strictly controlled trade in this commodity. The United States, however, developed a direct trade with China, which made available to Canadian consumers a low priced green tea, provided that it could be transported across the border in the face of the British prohibition. The price differential was sufficient to supply the necessary incentive. In 1839 it sold for Is., 9a. to 3d. in Rochester and Oswego, while the price of tea imported legally in Canada was 3s. 6d. Sir George Arthur remarked: "The difference, therefore, between these respective sums forms the profit produced on the smuggled article; and as the expense of transport is very trifling, the net gain may be computed, on the average, at Is. per lb.; and this is divided between the actual smuggler and the consignee."66 Tea was truly Britain's gift to the smuggler. Its bulk and weight were small in proportion to its value; it had a relatively inelastic demand; and, since it cheered but did not inebriate, its prohibition tended to alienate an important and influential female public opinion in Canada. Special reports of Imperial customs officers in North America had indicated that nearly three quarters of the tea used in Upper Canada was smuggled from the United States. Also, despite the general British assumption that the East India product was superior, the reports indicated that the Canadians actually preferred the strong green tea provided by the United States. If Canadian merchants wished to obtain this green tea legally, they had to buy it in New York and import it by way of Liverpool.67 Figures produced by the Board of Trade of Quebec indicated that, in one year, although only 917 chests of tea had been imported into the Canadas legally, the annual consumption reached 10,000 chests.68 During the 1830's the British government had been continually petitioned by Canada to repeal the prohibition against tea and to substitute a regular rate of duty. William Hamilton Merritt adopted a Smithian approach in a letter to Lt. Gov. Arthur: If—and the impossibility is but too apparent—we cannot prevent the introduction of smuggled tea on such a line of frontier as we possess, nor afford, consequently, to the fair trader, more than a nominal protection, it should seem evident, that no better course would be pursued than to legalize the importation of an article, the present exclusion of which, serves only to confer unlawful gains on individuals, at the expense of the public revenue, and to operate against the interests of the community at large.69

In the same letter Merritt claimed, "The power of regulating and imposing duties on every article grown or consumed in this province should be transferred to our Provincial Legislature." This last sentence raises the suspicion that the customs administration, serious though its inadequacies may have been, was being denigrated by parties in Canada who were eager for tariff autonomy. Sir George Arthur, however, agreed that the contraband trade was uncontrollable and held that it was politically dangerous as well. Independent of these considerations, it would be difficult adequately to describe the importance in a political point of view, of destroying the smuggling trade in this Province. Under its protection, the persons engaged in it can assist very materially in spreading disaffection

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through the country, and are readily enabled to keep up treasonable communications with the enemies of the Provincial government, in the United States.... Furthermore, the clandestine trade in tea induces a similar trade in numerous other articles; since the same vessels and the same individuals engage in smuggling of all kinds.70

Arthur was apparently on good ground. The Montreal Gazette of October 29, 1833, had quoted the New York Journal of Commerce to the effect that frauds on the revenue were increasing to an alarming extent on the northern frontier, and that there was along the border an ever widening belt, in the Canadian part of which there was "a remarkable abundance and cheapness of teas and silks," and in the American part, "an equal abundance and cheapness of loaf sugar and broad cloths." Lord Durham, in his report, likewise supported Canadian opinion concerning the causes and the prevalence of smuggling. There are laws which regulate, or rather prohibit, the importation of particular articles, except from England, especially of tea, which were framed originally to protect the privileges of monopolies here, but which have been continued in the Province after the English monopoly has been removed. It is not that these laws have any appreciable effect in raising the price of the commodities in question: almost all used in the Province is smuggled across the frontier: but their operation is at once injurious to the fair dealer, who is undersold by persons who have obtained their articles in the cheaper market of the United States, and to the Province, which can neither regulate the traffic, nor make it a source of revenue. It is probable, indeed, that the present law has been allowed to continue through inadvertence; but, if so, it is no very satisfactory evidence of the care or information of the Imperial Government, that it knows or feels so little the oppressive influence of the laws to which it subjects its dependencies.71

Sydenham suggested to the British government a solution along the lines of Merritt's proposal, that is, the removal of the embargo and the introduction of differential duties, higher in the interior than on the St. Lawrence, in order to keep trade in its proper channels. He considered that a duty on American tea 10 per cent higher than that on British would put an end to smuggling. However, such a change would still have left a duty well above the zero duty to which Canadian consumers had become accustomed. The reaction in Nova Scotia to his suggestion indicates an increasing awareness in the commercial community of the economic implications of tariff making. Halifax merchants immediately raised a cry of protest. They analysed the situation from premises different than Sydenham's and expected to lose all the tea trade. Sydenham also commented that Canadians, even of high station, including justices of the peace and officers of the militia, participated in smuggling without qualm. The contraband trade was fostering a looseness in political morals. Later on, when protectionism had been elevated into a political principle in Canada in emulation of the American example, a number of prominent citizens in various sections of the British provinces were accused of being "ardent advocates of protection by day and equally ardent practical free traders by night."72 The contraband trade became a subject of inquiry by the legislative assemblies of the Canadas. In 1825 a committee of the Legislature of Upper Canada concluded that "the inequality of price holds out a temptation to smuggling which is found to be irresistible." Another committee looked somewhat more deeply into the question in 1835, and finally in 1840, a commission surveyed the whole field of public administration and reported on smuggling in the following words: "The inducements to smuggling are the discrepancies in

34

CUSTOMS ADMINISTRATION IN CANADA

rates across the frontier. It is a crime in all countries looked on as one of no very heinous moral guilt, however subversive it be to the well-being of society in diminishing the resources of the State, and bringing into contempt the authority of its laws."73 One has the feeling of having been to this meeting before. Smuggling appears to have come to resemble the weather; everyone complained about it, but no one did anything about it. The commission did obtain some evidence and offered some suggestions. It estimated that 3,000 chests of tea were smuggled into Toronto yearly and gave the following reasons for the easy evasion of the revenue. (1) There was no penalty for failure to hold a permit to carry foreign goods. (2) There was no check on goods arriving coastwise at Canadian lake ports. (3) There was no customs examining warehouse at Toronto; goods were left on the open wharves, and could not be properly controlled under such conditions. Still farther west, smuggling had characteristics reminiscent of the contraband trade of early New France. In the Red River Valley it constituted one of the various attempts at evasion of the monopolistic restrictions of the Hudson's Bay Company. In 1835 Assiniboia was returned by the sixth Earl of Selkirk to the Company, which immediately took steps to establish civil government, and enforce its charter monopoly of trade. A tariff duty of 7.5 per cent was levied on Red River imports and exports, and the revenue from this was to be used to meet expenses incurred in the "maintenance of tranquillity" and the "enforcement of the laws, rules and regulations."74 The inhabitants here, as in the early eastern colonies, were to pay for their own discomfiture, in this case in the form of a monopoly directed against themselves. The new regulations struck directly at the independent traders and merchants who were at the time carrying on a flourishing traffic with St. Louis, Prairie du Chien, Mendota and other American outposts. Demonstrations before the gates of Fort Garry resulted, and, these failing, the obnoxious laws were openly and systematically violated.75 In 1836, at the request of the London officers, the Colonial Council reduced the duties to 5 per cent, then to 4 per cent, in a vain search for a rate which would provide both protection and revenue without providing incentive to smuggling. The authorities probably suffered from a lack of statistical information concerning relative elasticities of supply and demand, but in any case their failure encourages the view that there is no such ideal rate of duty. The administration of this private tariff system was carried out, of course, by Hudson's Bay Company officers. Hostile Indians between Pembina and the Mississippi lent informal support to the customs administration, but the price differential between American and Company fur markets was sufficiently attractive to result in a trade which required at one time a line of wagon trains consisting of 200 Red River carts. The Argus of Kingston reported on August 11, 1846, that the value of furs carried annually reached the amount of $20,000.76 It appears however that the American companies did not realize large profits from this contraband trade because of the high transportation costs and heavy payments for risk, but it is clear that the Hudson's Bay Company's monopoly was nevertheless being challenged with increasing success. The tariff authority finally reacted to the success of the smuggler more characteristically; it imposed increasingly onerous regulations. In an attempt to strike at the export trade through the import, the Governor in Council levied

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a 20 per cent impost on all supplies from Britain and the United States coming to persons suspected of trading in furs illicitly, or of aiding others to do so. All other importers were required to take out licences, in order to remain exempt from this duty. A rigorous system of espionage was also set up. "On the slightest suspicion or provocation a search would be made for contraband goods."77 These methods produced negligible results for the problem confronting the customs administration of the Red River Valley was really insoluble, largely because of the presence of the open land frontier. Geography had again aided the smuggler. By 1849, the monopoly of the Hudson's Bay Company was broken. The experiences of all the colonies with smuggling had one thing in common. There was evident a disposition on the part of absentee tariff authority to attempt to legislate the practice out of existence, and a conviction on the part of those closest to the situation that such a method could never succeed under the conditions obtaining. FREE PORTS AND OTHER MELIORATIVE DEVICES Free Ports The free port was an administrative technique fairly extensively employed in the period of British dominion. It is a meliorative device which is sometimes adopted in order to relax, at selected points, the formal customs and tariff laws of a country for the purpose of attaining some policy objective.78 Confusion will be avoided if it is borne in mind that the term free port has been employed in literature relating to Canada in a sense not commonly employed elsewhere. Apart from the free port areas of Gaspé and Sault Ste Marie, which were instituted in 1859, there have not been free ports in Canada in the usual customs sense. The earlier free ports were merely relaxations in the British Navigation Acts, permitting foreign ships to enter certain ports and discharge cargoes under carefully prescribed conditions. Such imports usually had to pay duties, however, either Imperial or colonial, depending upon the fiscal powers of the colony. These free ports were created by Imperial statute, and were a part of British strategy designed to protect the West Indian trade and ensure British commercial dominance in the North Atlantic. Halifax and St. John, N.B., were proclaimed free ports in 1818 (58 Geo. Ill, c. 19, Imp.) in an attempt to revive their former importance as entrepôts. The act provided that they should remain free ports for three years, during which time foreign vessels might bring to them the products of their own nations. It made no provision, however, for the exemption of duties, and it was left to the colonial authorities to provide relaxations of their customs laws, if they wished to, by granting drawbacks and free warehousing privileges. Nova Scotia, by provincial enactment (59 Geo. Ill, c. 7), allowed drawbacks of duty on some imports from the United States, as well as upon imports from the West Indies re-exported to the United States. Little came of this, however, as the United States refused to admit these products on the ground that discrimination was still being practised against her. Nevertheless, the British Free Port Act was made permanent in 1821 by 1-2 Geo. IV, c. 7, Imp., and the next year a new statute relaxed the restrictions against American vessels further and made Quebec a free port as well. As the British became more interested in attempts to assimilate all the customs laws of the Empire, and to substitute preferential duties for mercantilist prohibitions, more free ports were established. In 1825

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an Act to Regulate the Trade of British Possessions Abroad (6 Geo. IV, c. 114? Imp.) provided that trade with foreign countries could be carried on by Canada, but only through the following ports: St. John, St. Andrews, Halifax and Quebec» Owing to new difficulties with the United States, however, only Quebec was open to American shipping. The Maritime colonies were naturally interested in the wider application of the free port principle, and in 1831 the Assembly of Nova Scotia requested that all ports in the colony which had a customs officer be declared free ports, without extra charge, although it was admitted that free ports required more administrative supervision than did other kinds of port. Liverpool and Yarmouth only were granted free port status. The disappearance of the Navigation Acts removed the reasons for free ports of the type discussed above. They are of interest in that they illustrate "the old casuistical process of prohibiting all intercourse between foreign nations and colonies, as tradition demanded, and then making limited exceptions/'79 It should be remarked that the practice of selecting certain ports to be free ports is likely to raise complaints of discrimination between such ports and others not so favoured.80 Upon the elevation to independent free port status of St. Andrews, N.B., which up to 1822 had been merely an outport of St. John, dissatisfaction arose within the customs service and a plaintive letter went from the St. John officials to the Commissioners of the Customs in London: We humbly entreat your Honourable Board to permit us to express our deep regret that the cheap and perfectly effectual system which we had established and most carefully matured and maintained, in that district, for every possible purpose of trade, navigation and revenue, should be so suddenly abolished—thus annihilating at once, about one-third part of our income, which we flattered ourselves, our long personal service and81 unremitting attention to our duty, made us worthy to possess for the remainder of our lives.

The free ports of Gaspé and Sault Ste Marie deserve special attention, as they were free ports in the broadest sense. From a policy standpoint they constituted, in the later pre-Confederation period, an interesting if ill-conceived experiment in the employment of tariff relaxations as a means of attaining ends which were not strictly commercial. The free port of Gaspé was created in the anticipation that settlement would be promoted, and that the fisheries would be encouraged by the bounty which the purchase of duty-free supplies would give. It was also believed that a market would thus be established which foreign fishermen would use, and that a flourishing trade would be built up in this hitherto backward area. The free port of Sault Ste Marie was intended to encourage settlement of the western territory, to foster mining, to facilitate trade with the Red River settlements and the Northwest, to encourage fisheries on Lakes Superior and Huron, and to establish a market at which miners on the American shore might purchase supplies. These free ports were therefore clearly being established to promote development and settlement, and not merely to permit some trade. The entire free port site was excluded from the customs area of Canada, and the areas affected were large. The limits of the Gaspé free port were three miles inland from low water mark around the shores of the Gaspé Basin, and it embraced six ports of entry: Gaspé, Percé, New Carlisle, Garitón, Amherst, and Seven Islands. In length it took up 220 miles of coast on the south shore, 500 miles on the north shore, and included Anticosti Island as well. The Sault Ste Marie site extended along 800 miles of the shores of the upper Great Lakes. Bona

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fide inhabitants of these free port areas were to have duties remitted on all importations into the free trade areas, whether they were for consumption or for re-exportation to other countries. These experiments ended in failure, and i n 1866 the free port acts were repealed. The reports of the inspectors of the Customs Department of the Province of Canada indicated that this failure was almost entirely the result of administrative difficulties. There were, however, other and more general weaknesses i n the scheme, and these should be noted. For one thing, i t tran­ spired that the free entry of many types of commodity could not benefit the settlers, because most of their important goods were already on the free list. The principal saving to consumers was on spirits, and throughout Canadian history there seem to have always been doubts concerning the ultimate benefit to the consumer of cheap liquor. I t further appeared that monopolistic mer­ cantile enterprises took most of the benefits to themselves, instead of passing them on to the consumer. No trade developed between the free port area of Sault Ste Marie and the Red River settlements. The Hudson's Bay Company, which had always been the principal importer for that area, merely took ad­ vantage of the duty remissions to increase its profits. The principal complaints, however, were directed at the administration. Free port regulations for Gaspe required that all ships must report inward to Gaspe Basin when they cleared from other Canadian ports and were bound to any port of the free district; also that any vessel leaving any port of the free district must report outward, i f i t had on board any cargo except Canadian produce. The inspectors of ports stated that this reporting had become a mere formality and that there was no boarding and searching, the mistaken impression being that i t had become unnecessary since no duties were to be collected. Many ships' masters were deliberately evading the requirement to report i n order to avoid the loss of time involved i n going miles off course. The inspectors reported: "We are of the opinion that a thorough examination of both ships and cargoes entering and departing is, i n the interest of the revenue at other ports, even more necessary here than at ports where the duty is collected. I t is an essential precaution against smuggling." The inspectors were striking at at the fatal weakness of the scheme. The free port areas were becoming vast assembly points for smugglers, who carried on a large trade w i t h Canadian areas outside the free port zones. I t was estimated that contraband goods from Gaspe were sent at least as far as the port of Quebec? Apparently there was also much smuggling from this area into the Maritime Provinces, w i t h which, however, the inspectors were not overly concerned, since i t did not affect the revenues of the Province of Canada. A similar problem existed i n the Sault Ste Marie area, but here an additional complication was present. The Americans, anxious at this time to find excuses for abrogating the Reciprocity Treaty of 1854, found much fault w i t h the Canadian free port system. They charged the Canadians w i t h inconsistency in raising the high Gait Tariff against the United States on the plea of revenue needs, while at the same time destroying their own revenue by adopting these free trade institutions. They charged that the Canadian free ports threatened as well the revenue of the United States: 82

3

A wholesale merchant from the Northwestern States, or the region of the lakes, may purchase goods in bond in New York, convey them free of duty to Sault Ste. Marie and the territory fiscally attached to that port, and thence smuggle them into the United States—a process of

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which the risk of insurance by responsible parties is asserted to be no more than from five to ten per cent, according to the nature of the commodities themselves. Besides the injury which such a state of things must inflict upon the revenue of the United States, and the great expense of maintaining a sufficient number of officers to check illegal traffic, injuries no less serious will arise from the demoralizing influence of the vast army of smugglers which in a few years will thus be called into existence, and who, both by day and night, will be engaged in a system of continual secret warfare against the laws of the United States.84

The Canadian inspectors of the free port of Sault Ste Marie reported in 1863 that it would be impossible to prevent smuggling in that area: "To guard against the extension of contraband along so extensive a coast would require a very great extension of the Custom House service as well as the aid of officers afloat; this extension would involve a very considerable additional outlay, perhaps of as large a sum as that now lost to the revenue by the remission of duty."85 These duty remissions were estimated to amount to about $16,000 on imports of the value of $93,000 in 1861, and about $13,000 on imports of the value of $90,000 in 1862, for the free port of Sault Ste Marie only. The inspectors also expressed their opinion that the free port system had given no material stimulus either to settlement or to mining. These customs curiosities were abandoned in 1866. Their lack of success draws attention again to the close relationship between geography and administration in Canadian customs-tariff development. Once more it had proved to be impossible to provide effective administrative techniques for the carrying out of tariff policy with reasonable economy. It should be noted that in the case of the free ports the customs authorities were careful not to lay the blame for failure upon personal inefficiency within the service itself. The inspectors had much satisfaction in reporting "that the collectors and their subordinates are intelligent and fearless in the discharge of their duties."86 Customs Drawbacks and Bonded Warehouses Like the free port, the customs drawback and the bonded warehouse are examples of relaxation of customs regulations. The drawback, of course, lacks the geographical particularity which marks the other two. During the period under discussion both the drawback and the bonded warehouse were employed, but neither of them possessed the significance for tariff making and customs administration which they have come to possess in the modern Canadian tariff system. Discussion of their more technical features will be reserved, therefore, for a later chapter. The drawback is an old device. Britain and France employed it extensively, along with the bonded warehouse87 and the export subsidy, to further their mercantilist aims, and even Adam Smith supported its use on the ground that it tended not to destroy, but to preserve the natural distribution of labour.88 He added a warning, however, which serves to explain the elaborate accounting system which it imposes upon the customs administration. "Drawbacks, however, it must always be understood, are useful only in those cases in which the goods for the exportation of which they are given, are really exported to some foreign country; and not clandestinely re-imported into our own."89 In the Maritime colonies the drawback was used as a technique for encouraging the entrepôt trade. In the interior provinces it was first employed, it would seem, in 1795, when duties on salt used in the fishing industry were

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remitted. It was not, however, until the act of 22 Viet., c. 17, of 1859 that explicit encouragement through drawback privileges was given to manufacturing for export; a remission of 100 per cent of the duty on imported materials was allowed, when these materials were incorporated into manufactures which were then exported. The bonded warehouse, like the free port, is an exclusion from the customs area and therefore has somewhat different characteristics from the drawback. Goods, while stored in such warehouses, escape the payment of duty altogether. This does not, however, relieve the customs administration of responsibility for protecting the revenue. The effect is, in fact, the opposite. Warehoused goods must be retained under customs supervision, for they become dutiable should they eventually pass into the customs area for consumption. Complete records are therefore required. Usually some processing, short of actual manufacturing, is carried out in the bonded customs warehouse. Sorting and repacking, for instance, prevent the deterioration of some types of commodity. This is usually done under the personal supervision of a customs official. Generally speaking, there is a distinction between manufacture in bond and warehousing in bond. In Canada, manufacture in bond has been confined, for the most part, to goods subject to excise duties, rather than to customs. Distilling, brewing, and the manufacture of tobacco products are examples. The bonded warehouse may be employed to encourage export trade, but it may also serve as a meliorative device where commodities are imported merely for consumption, by enabling the importer to postpone the actual payment of duties until the goods are required for use. In this case, numerous restraints and regulations are imposed which importers often find troublesome. The Montreal Board of Trade commented in 1834 that the advantage of not having to pay the several duties immediately was offset by the complex nature of the bonds and entries required, by the fact that the importer was bound to thrice the amount of the duties so deferred, and by his having to pay storage charges to a customs warehouse when he might have a warehouse of his own. Nevertheless the Board considered the bonding privilege an important one, especially in times of commercial stagnation.90

CHAPTER F O U R

SOME EARLY CUSTOMS PROBLEMS CUSTOMS UNION IN THE CANADAS THE PERIOD between 1791 and 1840, in which Upper and Lower Canada attempted to exist as distinct political entities, provided a situation which is probably unique in the field of customs administration and tariff making. This phase of Canadian history has been treated, in its general political aspects, in a number of studies, and some have emphasized the fiscal problems that were involved.1 It is sufficient for the purpose of this survey to examine those features which hold special interest as problems of tariff technology. After the American Revolution the Imperial government was concerned with a political problem, and it failed to take sufficient notice of an important economic one. A serious political situation had been created by the influx of American Loyalists and disbanded soldiers of British and colonial corps into the western areas of Quebec and by their demands for a free constitution and a system of jurisprudence based on that of Britain. A solution was sought in the Constitutional Act of 1791 (31 Geo. Ill, c. 31) which divided the area into the two provinces of Upper Canada and Lower Canada, each with its own executive and legislature. The geography of the area posed questions of particular difficulty, however. The British government recognized the necessity of protecting Upper Canada against an exclusive control of the port of Quebec by Lower Canada, and reserved to itself the right of making laws "with respect to the imposing of duties for the regulation of navigation, or for the regulation of the commerce to be carried on between the said two Provinces, and for directing the payment of drawbacks" (31 Geo. Ill, c. 31, s. 46). Beyond this the Act failed to be explicit and when the newly constituted legislatures took up their tasks, the Quebec Revenue Act (14 Geo. Ill, Imp.), imposing duties on certain imports into the port of Quebec, was still in force. Thus the Constitutional Act created a customs union, but it seems to have done so unwittingly, and it is clear that some of the important prerequisites received no attention. As a result the very imperfect form of economic union which was instituted failed to function, and, in failing, brought down the whole political structure. If it could be argued that a single factor was responsible for the abandonment of the experiment, that factor was certainly the government's failure to solve the problem of customs administration. Sir George Arthur, commenting on the proposed bill for union in 1839, stressed thç importance of this: "Any argument in favour of the Legislative Union in which I see great weight, arises from the difficulty of imposing duties on imports and in the division of the revenues arising from them so as to do justice to both Provinces."2 Lord Durham reported along similar lines. Referring to the revenue question, he wrote: "It was for the better settlement of these points of difference that the union of the two Canadas was proposed in 1822; and the same feeling produces a great part of the anxiety now manifested for that measure by a portion of the people of Upper Canada."3 The characteristics of a complete customs union may, for convenience, be

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briefly stated: (a) There must be free trade over the entire area, (fo) There must be no internal customs lines, (c) There must be a common external customs line. (d) Customs-tariff authority must be exercised in common, or, by agreement, by one of the parties to customs union, (e) There must be a formula for the equitable division of the customs revenue. (/) Supervision of the customs administration must be carried out in some agreed manner. It has been held that where a community of political interest is lacking, the attainment of customs unification will be difficult. The fact that the Canadas experienced difficulty in satisfying any of these prerequisites suggests that the political auspices under which this customs union was created were not promising. Indeed, in creating two more or less sovereign provinces out of one, the Act itself was evidence of the diversity of political outlook. It is not surprising that attempts to solve the fiscal problem by imposing a customs union on the two provinces were impeded by a lack of political rapprochement. But this was not the only obstacle. Customs union was being forced upon two governments which had had no previous experience as customs-tariff entities upon which to base a scheme of revenue. The two new provinces had, in addition, quite different revenue needs. Despite Upper Canada's difficult position in 1821, Gourlay may have been correct in stating that her civil expenses were very modest at that time,4 but ten years later such was by no means the case. The overhead costs of an expensive and already decaying canal system were by then making heavy demands on the revenue. Lower Canada, on the other hand, seems to have had more revenue than was good for her. Lord Durham stated in 1839: There remains still [after permanent expenditures of £60,000] a considerable surplus to be disposed of for local purposes, in the mischievous manner which I have described in the preceding pages. A vigorous and efficient government would find the whole revenue hardly adequate to its necessities; but in the present state of things, I consider the existence and application of this surplus revenue as so prejudicial, that I should, as the less of two evils, recommend a reduction of the duties levied, were it possible to do this without an equal diminution of the revenue of Upper Canada, which can by no means afford it.5

The fiscal situation in the provinces was incongruous. The upper province needed revenues, but for economic reasons had favoured free trade across her frontiers.6 Lower Canada had an aversion to taxes for other than strictly local needs, favoured low duties, and was generally anti-commercial in her outlook, yet she had long been subjected to a maritime mercantilist system. The question is why, in the presence of so many obvious impediments to customs union, this kind of a customs-tariff form should still have been adopted. The answer lies in geography and in supposed administrative feasibility. In 1791 the only legal ports of entry for the total area of the two provinces lay in Lower Canada. If this situation were to continue, Lower Canada would clearly be in control of the collection of the customs revenue. To the extent that the British government was willing to permit local tariff autonomy, it also followed that that province, despite its anti-commercialism, would make the tariff. The alternative that faced Upper Canada was highly distasteful. She would have had to levy all her own customs duties and incur the trouble and expense of administering a customs frontier against Lower Canada. As the result of the vagueness of the revenue provisions of the Constitutional Act, she did in fact enact a tariff in 1793 (33 Geo. Ill, c. 10, U.C.), placing duties on wines, for the purpose of defraying the costs of government. By the terms of the act,

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these duties were evidently intended to be collected by the Collector of Quebec, then paid over to the Receiver General of Upper Canada. In order to avoid double taxation, Lower Canada was required to exempt these wines from the duties of her tariff, which she did (33 Ceo. Ill, c. 8, L.C.). But it had already become evident that it is one thing to enact general legislation, and quite another thing to ensure that it is carried out efficiently. It was agreed that the maintaining of a tariff on goods entering Lower Canada would duplicate machinery, embarrass trade, and create misunderstanding between the two colonies.7 This method was therefore abandoned before it was actually put into effect, and the two provinces reached the following agreement: "The Legislature of Upper Canada should not impose any duties upon goods imported into Lower Canada, and passing into Upper Canada, but should allow and admit the Legislature of Lower Canada to impose such reasonable duties on such goods as they might judge expedient."8 It was further agreed, "That of such duties as the Province of Lower Canada had already imposed, or might therafter impose, on goods, wares or merchandise, coming into the Province of Lower Canada, the Province of Upper Canada should be entitled to receive annually, and to dispose of one-eighth of their nett produce, the other seveneighths remaining for the use of Lower Canada."9 This was the compensation which Upper Canada was to receive for giving up most of her sovereignty with respect to customs revenues. The division of the revenue was based upon a population ratio. It had the advantage of being administratively simple, if not economically sound.10 The customs union functioned well enough until 1797, although it required compromise on the part of both provinces. Lower Canada was willing to ignore Upper Canada's illicit commercial intercourse with the United States in the interior, and Upper Canada had given up any positive choice in tariff making. In accepting the per capita formula for the division of the revenue, both provinces were attempting to avoid the administrative difficulties which they knew were inherent in a more precise and more equitable division. Jay's Treaty upset this precarious equilibrium. By opening up both provinces to the legitimate importation of supplies from the United States, it drew attention to the fact that a customs union has a single frontier facing outward. Moreover, the interior frontier between the two provinces would henceforth have to receive administrative attention. Difficulty arose because Lower Canada now applied duties to American goods entering the province through the port of St. John's equal to those levied upon imports by sea, while Upper Canada, by reason of administrative expense and fear of retaliation, refused until 1801 to set up a customs establishment. Lower Canada was naturally unwilling to share her customs revenues on a per capita basis with a province which, as far as she knew, might be not only consuming American imports, but also permitting their passage through its territory into Lower Canada. It was decided by a joint commission of the two provinces that the population basis, as it stood, could no longer suffice. Upper Canada, for its part, had become dissatisfied with the ratio, for it claimed that its population had been growing rapidly in comparison with that of Lower Canada. Some method was required for ascertaining the relative proportions of dutiable goods consumed by the inhabitants of each of the colonies. The commission finally determined upon a method for making this calculation, but only with a "reluctance" and a "misgiving" which, as it turned out, were well justified.11

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A "joint inspector," in the pay of both provinces, was stationed at Coteau du Lac, on the St. Lawrence near the boundary between the provinces, and boats and carriages passing from Lower Canada into Upper Canada were required to report to him all articles subject to duty. From these reports the inspector was to produce two general accounts for the legislative assemblies of Upper and Lower Canada, on the basis of which the revenues collected were to be distributed. It should be emphasized that it was in no way intended to create an internal customs line, and no duties were collected at Coteau du Lac. Nevertheless the whole customs union came to grief as a result of the failure of this seemingly simple arrangement to function to the satisfaction of either province, especially of Upper Canada. While it may be true that a lack of rapport at the political level was ultimately responsible for this failure, there were also serious technical weaknesses, which a brief examination of the scheme will disclose. The law required that all boats and canoes reaching the locks be detained until there was delivered to the inspector a written account, signed by the persons responsible for their lading, specifying the quantities of articles subject to duties in Lower Canada. If the inspector had any reason to doubt the accuracy of these accounts, he could demand an oath from the signatory within three months. Refusal to verify such accounts on oath carried a fine of ten pounds. In the case of carriages and sleighs, a similar report was required. Failing this, the driver had to give a verbal account of such articles to the satisfaction of the inspector. If this was not forthcoming, the inspector could search the vehicle and ascertain for himself the nature of its contents. The penalty for a carriage failing to stop was ten shillings. Boats and carriages passing downward from Upper Canada into Lower Canada were also required to stop and deliver similar accounts, upon penalty of forty shillings in the case of boats, ten shillings in the case of carriages. The inspector reported such dutiable goods in the same way as he reported dutiable commodities passing the other way. The duties collectible in Lower Canada were deducted from that proportion of the revenue which was payable to Upper Canada.12 This arrangement was maintained, by renewal, until 1817, but it was not a happy one. Recriminations marred every meeting of the provincial commissioners and of the arbitrators who were appointed, under the Articles of Provisional Agreement, to straighten out the muddle. It was soon clear that this method of ascertaining the amount of drawback was defective "from the nature of the boundary between the two Provinces, and other causes."13 Upper Canada did most of the complaining. The attitude of the lower province became increasingly cynical. It was suggested that if Upper Canada was dissatisfied it should collect its own duties, and on one occasion the commissioner from Lower Canada stated "that these evils were the unavoidable consequence of depending for revenue on the Legislature of another Colony, to which the Legislature of Upper Canada had long consented."14 A singular aspect of the administrative arrangement was that goods passing into Upper Canada by way of the Ottawa River route were completely ignored on the assumption, later claimed to be by no means justified, that such goods were in transitu, destined for the Indian trade. It was stated that "to attempt a distinction there would have created insurmountable difficulties, with additional expense in the execution, and would not have been acceded to on the part of

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Upper Canada."15 Merchandise entering Lower Canada via the port of St. John's was also exempted from administrative treatment at Coteau du Lac. Lower Canada appears to have obtained, in addition, an unfair advantage over the upper province by virtue of her entrepôt trade. Large quantities of British goods, after paying duties of entry at Quebec, were passing into the United States through St. John's. Upper Canada got none of the revenue from these duties and presumably had no legal claim to them. The fact remained that such goods were not consumed by the inhabitants of Lower Canada, and Upper Canada was deprived, through the type of administrative device employed, of her proper ratio of the total revenue of the port of Quebec. It is not unusual that the requirement to pass goods through customs formalities, even with the assurance that no duty is collectible, leads to attempts at evasion. A contraband trade is likely to arise with the object of evading, not the duty, but the real or fancied inconveniences. The commissioners of Upper Canada made heavy claims against Lower Canada for drawbacks to compensate for such evasions, and produced many letters purporting to show that the inhabitants of entire districts in Upper Canada were, for no other reason than this, deliberately destroying the revenue of their province. It was stated that one sleigh or carriage out of every five, and a smaller proportion of boats, failed to report to the inspector at Coteau du Lac.16 Arbitrators, on behalf of Upper Canada, attempted to verify this charge by examining the books of important merchants in Lower Canada, and arrived at a similar conclusion: "The facility of passing the Custom-house at the Coteau du Lac both by land and water, which could not be remedied (there being no natural barrier to prevent it) by any means that could be justified by the amount of revenue to be collected, and the temptation to avoid it in order to escape the inconveniences of detection, occasioned the loss to Upper Canada of drawbacks on goods to a very large amount/'17 Apparently there was some fear on the part of travellers that the driver of a carriage who failed to satisfy the inspector as to the nature of his merchandise might have to return all the way to Montreal to obtain properly completed documents. Lower Canadian members of the committees were disinclined to entertain any such claims on the ground that there could be no object in such evasion, as it would mean "risking a fine, defrauding the revenue of his own province, and not benefiting himself." Lower Canada made the logical point that, in any case, if goods were not reported to the inspector, it was an infraction of the law and became a contraband trade over which Lower Canada had no more control than did Upper Canada. Upper Canada was able to show, however, that Lower Canada had been negligent in the matter of the publication of information to those responsible for the administration of the customs acts. By the act of 53 Geo. Ill, c. 11, L.C., new ad valorem duties had been levied, but the official at Coteau du Lac had not been informed of this fact, with the result that he had failed to account for these duties, to Upper Canada's loss. Another matter which further increased the recriminations was that Lower Canada applied differential ad valorem duties of 5 per cent on importations by "foreign" importers, and of 2.5 per cent on those of residents of Lower Canada. These provisions failed to distinguish between "the merchant of Upper Canada and the mere adventurer from Britain," and Upper Canada demanded compensation: The returns made by the Inspector at Coteau du Lac did not, and could not particularly distinguish Goods bearing a duty of five per cent ad valorem from those bearing only two

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and one-half per cent. It is, indeed, very evident from the extraordinary disproportion between the Goods entered at five, and those at two and one-half per cent when compared with the imports at Quebec during the 1preceding summer, that the returns of the Inspector were in this respect, grossly inaccurate. 8

A further matter also required adjustment. During the war with the United States, supplies for the military had been moved from Lower Canada into the upper province, on the account of the Commissariat, and no record had been kept by the inspector, again to the detriment of Upper Canada's revenue. Here, apparently, was administrative confusion on a grand scale. The evidence suggests that it was closely related to the fact that Lower Canada exercised its right to make the provincial tariff without any regard to the position of Upper Canada or to the problems of administration to which its arbitrary enactments gave rise. By 1817 the administrative muddle was so serious that the system of inspection was given up, and Upper Canada had to petition for six more years before she received even a part of the compensation she claimed. The per capita basis was then readopted, giving to Upper Canada one-fifth of all duties collected at the port of Quebec, "a proportion fully justified by the comparative population and consumption of the two Provinces within the period."19 The last part of this remark is surprising in the light of the difficulties that had been experienced in arriving at any measure for determining the relative consumption in the two provinces. Lack of precision in an administrative technique had resulted in the breakdown of an entire system of revenue, giving the lie to those who had confidently observed in 1797, "Rigid accuracy between Provinces of the same Empire is not necessary."20 Upper Canada was anxious to have the division of the revenue placed upon some permanent basis, but Lower Canada was not helpful. In 1819 the Legislative Assembly of the lower province failed to appoint its commissioners, the agreement was not renewed, and Upper Canada received no revenue from the duties for two years, with the result that every branch of her public service was threatened with financial ruin. She finally appealed, in despair, to the British government. The administrative breakdown led to a movement for a political union of the two provinces, and a Union Bill was introduced in 1822 to embrace the political, commercial, and financial aspects of the problem.21 Had political union taken place then, this customs problem might have been solved, but the British government got around only to the enacting of legislation to cover the financial and commercial phases. There resulted the Canada Trade Act (3 Geo. IV, c. 119, Imp.) which was an attempt by Britain at tariff assimilation.22 It failed to satisfy Upper Canada for many reasons of a general economic nature, but in particular, as it concerns the present discussion, because it still left that province with no positive voice in tariff making. Nevertheless, under a board of arbitration set up by Britain, Upper Canada did fare somewhat better with respect to the division of the customs revenue, receiving after 1828 onequarter of it. In 1832 she claimed one-third, and this was awarded by the board of arbitration over the protests of Lower Canada.23 This quarrel raised the question of annexing Montreal to Upper Canada so that she could collect her own duties on sea-borne trade, but nothing came of the proposal. It also led to renewed demands for the political union of the two Canadas. However, the imperfect customs union persisted for seven more years, until the Act of Union finally settled the issue in 1840, by placing the revenues of the two former

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provinces in a consolidated revenue fund, which was to bear all the costs of collection and administration. In summary it is useful to consider to what extent the characteristics of a complete customs union were present in the two Canadas. That there was free trade over the entire area embraced by the two provinces there is no reason to deny. There was no internal customs line in the strict sense; however, the administrative attention given to merchandise at the interprovincial boundary did apparently give rise to a contraband trade which differed only in degree from that which might have resulted from a customs frontier between the provinces. It must be concluded that there was an exterior customs frontier embracing the whole area of the union, although it could scarcely be said to have existed for practical purposes before Upper Canada was forced to raise custom houses against the United States in 1801. The principal tariff power was exercised by a single authority, that of the lower province. Even here, however, it should be remembered that the division was not clear-cut. The Imperial government still imposed the old Crown duties and held a veto power over colonial enactments. Also, Upper Canada exercised tariff authority over her rather moderate dutiable importations from the United States across the interior frontier, and between 1819 and 1829 the duties imposed were different from those imposed by Lower Canada. In general, however, it may be said that she had no control over the bulk of imports entering the customs area of the union. But it was in the remaining two prerequisites for customs union that the imperfections stand out most clearly, and these were weaknesses in customs administration. An adequate formula for the division of the revenue was not achieved, and the effectual supervision of the administration, which is necessary if customs union is to be successful, was lacking. The foregoing discussion has attempted to show how a political controversy again assumed the form of a struggle over public finance, and how, since the customs duties provided the basis of the revenue, the issue was again brought to focus upon the customs administration. The history of public finance in Canada offers little evidence of a disposition to take the tariff out of politics. As this study proceeds, support continues to grow for the view that the imperfections of the customs administration have been exploited by interest groups for political purposes. RECIPROCITY AND THE GALT TARIFF The Elgin-Marcy Reciprocity Treaty of 1854 was an important event in Canadian commercial and political history, and has received careful attention in Canadian historical literature, the most extensive study being that of Professor Masters.24 Only its broader aspects will be considered here, in order to indicate the place of the treaty in the environment of customs administration. This treaty does not appear to have solved any of the existing problems of the customs administration, but it did result in the creation of several new ones, for the most part, indirectly. Exclusive commercial agreements which fall short of complete customs union are likely to add to the burden of customs administration, unless the administrative treatment of imports is itself the subject of successful negotiation, in which case procedure may be simplified.25 This

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is largely simple mathematics. If the chief object of reciprocity is realized, a greater flow of products across the frontier will result, and hence there will be more for the administration to do. There must be added to this, however, the effects of the differentiation of the tariff schedule which results from such agreements. It becomes necessary to classify favoured commodities properly in order that they may receive the concessions provided by the terms of the agreement. This requires proof of origin, involving certification of invoices and, usually, the receiving of oaths. The desire of Canada for reciprocity with the United States was largely the result of external factors. Prior to 1846 the economy of the British provinces had been based on the British preference and the St. Lawrence waterway. When the revolution in British commercial and colonial policy left this economy floundering, closer relations with the United States naturally appeared highly attractive. From these circumstances, the commercial history of the Province of Canada falls readily into three distinct periods: 1840 to 1849 characterized by the economics of preference; 1849 to 1854 by the economics of transition; and 1854 to 1866 by the economics of reciprocity. In the second period the British government was concerned less with the trade relations of the Canadian provinces than with the political implications of the fisheries question; and the treaty of 1854 was more than a mere agreement to share natural products on a dutyfree basis. It also provided that the United States and Canada should mutually enjoy the Atlantic coast fisheries and the canal systems of both countries, and the St. Lawrence as well. The treaty was to run for ten years, and thereafter to be subject to twelve months' notice for termination. The treaty resulted in increased trade. This was more conspicuous in Canadian exports than in her imports, although the relative share of the United States in Canada's import trade did become greater. On the whole, however, it was of greater advantage to the export trade of Canada than to that of the United States. Such results were apparently anticipated, but it was expected that the United States would be compensated by the opening of the Canadian fisheries and waterways and by the benefits accruing to American commission houses and railways. These expectations were fulfilled in a considerable measure until revision of fiscal policy in Canada and conditions accompanying the Civil War in the United States altered the situation. During the eleven years of the treaty the total trade between the two countries increased approximately threefold, the trade with Canada becoming, for the United States, second in importance only to its commerce with Great Britain. The Reciprocity Treaty is of particular interest to the student of tariffs because it forced the British colonies of eastern North America to act for the first time as a single customs-tariff unit. Regional differences in resource patterns, economic advancement, and political outlook had somehow to be reconciled so that the provinces might present a common front to the United States. It is not surprising that some provinces complained that their interests had been sacrificed. Nova Scotia appears to have suffered the most. What is surprising is that for three years after 1854 everyone in Canada and the United States seems to have been entirely pleased with the way in which the treaty was working. The principle of comparative advantage was successfully operating within a large free trade area, with respect to natural products. It is important to note that as the result of geography the trade which developed was interregional rather than international in the stricter sense. Exactly similar products

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crossed the customs frontier at different points in opposite directions. Geographic contiguity and limited transportation facilities encouraged a local frontier trade. As time went on, however, it came to be recognized that while the treaty was producing excellent results in increasing commercial intercourse, it had a serious defect from the point of view of public finance, and as is invariably the case, the recurrence of economic depression had much to do with bringing about a changed outlook in customs tariff matters. Canada had already been realizing the weight of the heavy overhead costs of her transportation system. In the 1850's she began to employ relatively high duties on manufactured goods as a means of carrying this burden, culminating in the Gait Tariff of 1859, possibly the most controversial tariff in Canadian history. It was assailed by the British, the Americans, and some Canadians, in each case on different grounds. Gait may possibly be accused of having shifted his ground often in defending this tariff, but it is important to note with some care the circumstances which determined its nature. In the first place, Canada had to raise revenue, and the tariff was the only available method, as the province lacked both the realized property and the administrative machinery for further direct taxation. Natural products were bound at zero duty by the Reciprocity Treaty, but the treaty made no mention whatever of manufactured goods. It was clear to Gait that if new duties, appreciably higher than those of the United States, were levied upon already taxed articles of general consumption, the smuggler, rather than the government, would reap the revenue, since the Canadian customs administration had already exhibited its inability to prevent smuggling.26 But American rates of duty on manufactured articles were high. Manufactured goods were therefore the logical commodities to tax for the needed revenues. It is true that Canadian manufacturers had been agitating for protection of domestic industry in this period, and it is also true that Gait on one occasion remarked: "It will undoubtedly be a subject of gratification to the government, if they find that the duties, absolutely required to meet their engagements, should incidentally benefit and encourage the production in the country of many of those articles which we now import/'27 But he said at the same time: The fiscal policy of Canada has invariably been governed by consideration of the amount of Revenue required. It is no doubt true that a large and influential party exists, who advocate a Protective policy, but this policy has not been adopted by either the Government or Legislature, although the necessity of increased taxation for the purposes of Revenue has to a certain extent compelled action in partial unison with their views, and has caused more attention to be given to the proper adjustment of the duties, so as neither to stimulate nor depress the few branches of manufacture which exist in Canada.28

The terms in which Americans criticized this tariff suggest, however, that already the word "protection" was being charged with the emotional complex which was to make the Canadian tariff the subject of so much political controversy in later years. The persistent use of the term "protective tariff where the context calls merely for the term "high tariff probably constitutes a problem of semantics rather than of economics, but it has resulted in an enormous volume of oratory over the past century and has tended to exaggerate the importance of tariff policy as a political party issue in Canada. There were obviously a number of issues involved in the tariff of 1859, and Gait's masterly defence of his policy causes one to wonder, with Professor Innis, whether he was a good economic theorist or merely an astute rationalizer.29

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In any case, the making of this tariff which had so much to do with setting the character of all subsequent Canadian tariffs was powerfully influenced by considerations of administrative feasibility. Americans emphasized the tariff of 1859 as the cause of the breakdown of reciprocity. The evidence suggests, however, that this outburst was merely symptomatic of a dissatisfaction which had many causes of earlier origin. Probably the fundamental difficulty of the Reciprocity Treaty was that the agreement involved not merely the granting of exclusive right against exclusive right. The number of separate issues involved required as well the granting of equivalent right for equivalent right, and the two countries ware unable to evolve statistical methods equal to the task or convincing each other of the value of their concessions. It was of course a difficult problem. The benefits to the Americans of the opening of the Canadian coast fisheries and waterways had to be measured against the disadvantages to American producers of lumber, fish, and coal, and the result balanced against the trade in general consumption goods along the frontier. The benefit of free navigation of the St. Lawrence failed to meet American expectations, and the valuation methods employed by Gait were blamed principally for this, as having the effect of directing import trade away from New York and through the St. Lawrence.30 To this Gait was able to reply that he had merely adopted the American method of valuation. The Americans claimed that Canada was enjoying an unreasonably large favourable balance on the commodity account. Canadians held, however, that the figures used to support this claim were unreliable, as American customs authorities had placed an inflated value upon the free goods imported from the Canadian provinces, especially during the Civil War.43 There were charges from both sides that administrative regulations and special interpretations were employed to thwart the overt intentions of the treaty. Between 1856 and 1860 consular certificates, with a fee of $2.00, were demanded by the United States Treasury to prove the origin of shipments of over $100 value exported by Canada on which exemption from duty was claimed. A letter from the United States consular agent at Clifton (Canada West) to W. H. Merritt in 1859 stated that he had issued 849 such certificates over a period of less than two years.32 A petition to Sir William Fenwick Williams, Administrator of the Government of Canada, in 1860, complained: Sinee 1857 United States Consuls in every Canadian port have exacted fees from Her Majesty's Canadian subjects on exports, and British Consuls have also been established in Certain American Lake Ports, under obsolete Laws which have not been in operation for forty yearscreating delay, dissatisfaction, and useless embarrassment on the Trade between the United States arid Canada from which American citizens are exempt.33

The British Consul at Chicago warned Merritt privately of the danger of a strict interpretation of the law by collectors of customs in the United States if public opinion should demand such action,34 and there were complaints from Canada that the tariff classifications were being narrowly interpreted in order to avoid the concessions called for by the treaty. For example, boards which were merely planed were being classed as manufactured goods. It was also charged that after 1857 a thriving milling industry along the Welland Canal was being jeopardized because American officials were barring the free importation of flour manufactured in Canada from American wheat on the ground that it did not qualify as "the growth and produce of Canada." While this was

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going on, "wheat, com and other Grain, the growth of Canada, is now purchased by United States Millers, in Canadian Ports, shipped in United States vessels, ground in United States Mills, shipped again in United States vessels, and sold in Canadian markets at the present moment/'35 The uncertainty created in the minds of Canadians by these alleged violations of the spirit of reciprocity, and by threats of even stronger measures, is indicated by the nature of the heavy correspondence between W. H. Merritt and the Collector of Customs at Oswego.36 Merritt, who had both a public and private interest in the frontier trade, was continually seeking such assurance as he could get from that source that the boom would not be lowered. As has been noted, the principal American complaints were directed at the Canadian duties on manufactures, and at the valuation regulations of the Gait Tariff. It has also been observed in connection with the free ports that Americans were ready to interfere in a matter which the Canadian government insisted was a purely domestic one, and not the concern of other countries. The question of canal tolls also arose. While such tolls are not customs duties, they can exert a similar influence upon the channels of trade, Canada was accused of discriminating against the United States by remitting canal tolls on vessels which either continued down the St. Lawrence or put in to Canadian ports.37 Canada was able to retort, however, that the United States government had failed to open American canals to Canadian ships, despite its promise to do so. Such incidents were, of course, all a part of the ancient struggle between Montreal and New York. Concerning the effects of the Reciprocity Treaty on the American customs, the Hon. Israel T. Hatch, an agent of the Treasury Department, sadly remarked that the duties collected under the treaty by American custom houses did not pay for the expense of maintaining them.38 But though the Americans were anxious to abrogate the treaty and did so when the Civil War brought about a breakdown of political relations between the United States and the British Empire, they did not fail to see advantages in relaxing still further the customs barriers between their country and Canada. Having condemned the Reciprocity Treaty, the Comittee on Commerce in 1862 extolled the idea of a complete customs union in North America and enthusiastically instanced the German Zollverein as the ideal model. The theoretical economic advantages of customs union were fully presented,39 and emphasis was also placed upon the administrative benefits. In its reference to the gains that would accrue from a single customs line embracing the United States and the British provinces, the committee noted "the ease with which revenue can be collected on the Atlantic frontier, and the difficulties which attend its collection in the interior of the continent." A Nova Scotia collector might have found such a claim difficult to accept. Gait commented on this customs union proposal as one wholly inconsistent with the maintenance of their [the British provinces'] connection with Great Britain, and also opposed on its own merits, to the interest of the people of these Provinces. . . . In the consideration of the rate of duties to be levied on imports the United States, as being the more powerful country, would necessarily impose her views upon the confederation, and the result would be a Tariff not as now based upon the simple wants of Canada, but upon those of a country now engaged in a colossal war, which must for many years demand enormous contributions from the people, among the means of obtaining which Customs duties will certainly rank as an important source of revenue.40

Not only were most Americans and some Canadians opposed to the Gait

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Tariff, but British exporters and colonial authorities had strong objections as well. British manufacturers, in their comments on the Gait Tariff, drew attention to a weakness which they conceived of as growing out of the administration of the customs: "It is important, too, to remember that the American manufacturer has more than one thousand miles of frontier over which he can smuggle with impunity."41 Newcastle, the Colonial Secretary, in forwarding this complaint to the Governor General of Canada, also remarked: Practically, this heavy duty operates differentially in favour of the United States in consequence of the facility for smuggling which so long a line of frontier affords, and the temptation to embark in it which a duty of twenty per cent offers. Regarded as a fiscal expedient the measure is impolitic; for while any increase of contraband trade must be at the expense of the exchequer, the diminution of foreign importations will probably more than neutralize the additional revenue derived from the higher duty.42

Gait replied: The Chamber of Commerce at Sheffield evidently is quite ignorant of the principle upon which the valuation of goods for duty is made in Canada—which is on the value in the market where bought. The Sheffield goods are, therefore, admitted for duty at their price in Sheffield, while the American goods are taken at their value in the United States. This mode of valuation is clearly in favour of the British manufacturer; and is adopted with the deliberate intention of encouraging the direct trade.4^

Out of this exchange came Gait's famous statement on constitutional principle, which all Canadian schoolboys are supposed to know by heart: It is therefore the duty of the present Government distinctly to affirm the right of the Canadian legislature to adjust the taxation of the people in the way they deem best, even if it should unfortunately happen to meet the disapproval of the Imperial Ministry. Her Majesty cannot be advised to disallow such acts, unless her advisers are prepared to assume the administration of the affairs of the Colony, irrespective of the views of its inhabitants.44

For the more technical purposes of the present study, however, the important consequence of the tariff of 1859 was not this justly famous remark, but the new emphasis on ad valorem duties and the shift in the basis of valuation for duty. AD VALOREM DUTIES AND THEIR ADMINISTRATIVE CONSEQUENCES Ad valorem duties were not unusual in early colonial tariffs. They were employed fairly extensively during the French régime,45 and in the early British tariffs, there was usually a uniform 2.5 per cent levy upon all imports, both foreign and from the Empire, not specifically dutiable or on the free list. Soon after Upper Canada began making its own tariffs, an increasing emphasis on ad valorem duties became evident. The act of 56 Geo. Ill, c. 28, U.C.,46 was the first Canadian tariff that levied substantial duties on manufactured goods, and the ad valorem principle was broadly employed. As will be demonstrated in some detail in a later chapter, there is probably no area of customs law which places so much control over the tariff in the hands of the administration as the provisions which determine dutiable value. The earliest valuation clauses had instructed collectors to accept the invoice price of the commodity as the basis for duty. Evasion of the revenue duties

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under such a system required only collusion between importer and foreign supplier. After 1815 the method of arriving at dutiable value by importer's oath was employed where the invoice was not available or where its accuracy was in doubt. As a check upon undervaluation by the importer, the government reserved the right to purchase the goods at the attested price plus 10 per cent. The form of oath prescribed in 6 Geo. IV c. 114, was the following: "I, A.B., do hereby declare, that the articles mentioned in the entry and contained in the packages (here specifying the several packages, and describing the several marks and numbers, as the case may be) are of the value of. . . ." The act provided that if on examination of the goods and the invoice, when obtained, this valuation was shown to be wrong, an oath could be demanded from the importer stating that he verily believed the invoice price to be the current value of the articles at the place from whence the said articles were imported, "and such invoice price, with the addition of ten pounds per centum thereon, shall be deemed to be the value of the articles, in lieu of the value so declared by the importer, and upon which the duties imposed by this act shall be charged and paid." It was further provided that if there was any suspicion that goods were invoiced at too low a figure, the governor could appoint two competent persons, who would declare on oath the true value. This valuation was final, but there was provision for appeal to the court of record or vice admiralty against the actions of officials. A surety of £60 was demanded from the appellant, however, before appeals could be initiated, and this would likely discourage this kind of appeal. Furthermore, it was provided that such suits must be withdrawn immediately if an offending customs officer tendered amends. Ad valorem rates came to occupy an increasingly important place in the Canadian tariff from this time forward. In 1849 Hincks abolished purely specific duties and also made an important change in the administrative provision respecting valuation for duty. Instead of accepting the specific purchase price at the point of export as the basis for duty, the cash value in the principal markets of the exporting country was henceforth required. Hincks had apparently been influenced by the United States tariff, which was growing protective, and had adopted a similar valuation procedure. After Cayley's experiment with specific duties in 1858, Alexander Gait readopted ad valorem duties, applying them to the entire list of dutiable imports, except whiskey. Such a tariff became enormously effective when applied in conjunction with the altered basis of valuation, not only as a producer of revenue, but also as a regulator of trade. Gait explained his tariff policy as follows: The main object was to readjust the duties so as to make them press more equally upon the community by extending the ad valorem principle to all importations, and thereby also encouraging and developing the direct trade between Canada and all foreign countries by sea, and so far benefitting the shipping interests of Great Britain—an object which is partly attained through the duties being taken upon the value in the market where last bought. The levy of specific duties, for several years, had completely diverted the trade of Canada in teas, sugars, &c to the American markets, and had destroyed a very valuable trade which formerly existed from the St. Lawrence to the lower provinces and West Indies.4?

Gait's enthusiasm was not shared in all quarters. A merchant in Canada West complained of the loss of the New York market, which, he said, was a natural market in which to buy, as one could there get variety, small or large quantities, and liberal credit:

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As our purchases are all made, and must be made in the New York market, the difference of duty paid by the Upper Canada Merchant will be equal to the difference of price at the place of growth and New York, which will not be over estimated if placed at from forty to fifty per cent. However Mr. Gait may attempt to garnish it over, this is the simple, practical fact, and no amount of sophistry or argument can undermine it. It is an enormity to suppose that the mere transition from specific to ad valorem duties will change the whole commercial relations of the country, and convert the Province from a secondary to a primary market at a bound.48

Reactions in the United States, however, suggest that in that country it was feared that Gait was right and the merchant was wrong. The Gait Tariff was decried as a violation of the reciprocity agreement.49 The Canadian tariff was obviously becoming a more sophisticated instrument, with broad implications for importers, exporters, manufacturers, and government policy makers. The fact that growing importance was being attached to the choice of tariff rate, and that the administrative provisions employed to enforce them were leading to controversy, suggests that Canadian tariff makers were already beginning to encounter, as the result of a changing economy, administrative problems of a technical kind.

CHAPTER F I V E

THE C U S T O M S E S T A B L I S H M E N T IN BRITISH NORTH AMERICA THE CUSTOMS ESTABLISHMENT in North America was, of course, based on the British model, a form which seems to have had its beginning around the year 1275.1 Although in Quebec the custom house movement began in 1762, the Atlantic colonies had had a long experience in customs administration by that time: there was a Crown Collector of Customs at Annapolis Royal as early as 1719. The system was controlled, nominally, by a Surveyor General, appointed for the northern district of North America, but it appears that, for the most part, he performed his functions in absentia. Revenues from the duties were usually payable in sterling to the Receiver General for the provinces. This official was appointed by the Crown, through the Governor, but was responsible to the Commissioners of the British Treasury. The first Receiver General was appointed in 1765 at a salary of £200 in lieu of fees. His instructions from the Treasury were that he should remit any surplus after the expenses of collection and the costs of local administration had been paid. Annual accounts were to be rendered to the Treasury, which held the right to audit them, but the council of the province of Quebec likewise claimed this right, and confusion ensued. The Receiver General was virtually suspended from office by Dorchester in 1789 as the result of an investigation into his affairs. It had been found by 1767 that absentee officialdom and slow communications between England and the American continent were rendering an effectual administration of the fifteen hundred or more regulatory acts impossible. Also, merchants in the colonies who wished to petition the Treasury on revenue matters were suffering intolerable delays. The higher control of the customs administration was accordingly brought nearer the scene of activity. Five resident commissioners, with powers similar to those exercised by the Commissioners of the Treasury in London, were appointed to the dominions. They could appoint and remove inferior officers, issue warrants for rewards, compound for petty seizures, administer oaths, and empower cashiers to pay salaries out of the customs receipts. They could search ships by day or night and warehouses by day. Other officers of the Crown were enjoined to assist them in their duties. Their orders came from the Treasury, and they were required to remit any surpluses which might come to them from the provincial Receiver General to the Receiver General of Customs in England. Their salary was £500.2 The principal officer of the colonial custom house was the Collector, formerly called the Customer, who was in charge of the actual collection of the duties and the recording of all shipments. He was, and still is, responsible for all moneys, for their safekeeping and their remission to the Exchequer. During the period in which the salaries of all officers were under Treasury control, the Collector was empowered to hold back from the gross revenue sufficient to pay salaries and contingencies.

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The Controller acted as a co-partner and as a check on the Collector and was required to keep duplicate accounts. His duties were not onerous, and, unless he happened to be employed as a sub-collector in charge of an outport, he appears to have done little more than sign the Collector's quarterly returns to Treasury, and receive a share of the fees. When an inspectoral system was set up in Canada, apparently in 1840,3 the port Controller was replaced by a system of inspection and audit under departmental control. In earlier days, the Controller met the need for some kind of oversight of administration which experience has always shown to be necessary. When the collectors were appointed by the King, the revenue at the same time being farmed to individuals, the Controller was an appointee of the farmer, with the duty of protecting the farmer's interest. Where the farmers appointed the Collector, the King then appointed a Controller. Where the revenue was not farmed, both the Collector and the Controller were the King's appointees, which suggests that the King distrusted his own Collector, or his own Controller, or, even more likely, both. The third official of the custom house was formerly called the Searcher, and the title is fairly self-explanatory. He handled, or supervised the handling of, merchandise and determined its dutiability, a function carried out today by an important officer known as the Appraiser. The Searcher, or Appraiser, does not levy the duty, but at least in theory, merely reports his findings to the Collector. His two basic functions are rather closely connected, for he first determines the classification into which commodities fall, which is obviously important under either specific or ad valorem types of duty, and then determines their dutiable value, a vital function with ad valorem duties. The office has long been recognized, therefore, as the keystone of the whole customs establishment. A Royal Commission on Customs and Excise declared in 1927: "A proper system of appraisal lies at the very base of the customs administration."4 Assisting the Searcher were two officers of importance in the early Canadian establishment. One was the Waiter, whose duty was to meet all ships in order to prevent the landing of any commodities, contrary to the law, before they had been properly customed. The other was the Gauger, whose function was naturally an essential one owing to the importance, in earlier tariffs, of duties upon wines and spirits. The larger ports also had a Surveyor. His duties appear to have been varied, but in general he acted as a control over the searchers and waiters. This office still exists in the larger custom house, where the Surveyor is an assistant to the Collector, with the duty of supervising the practical administration of the custom house, and especially its outside activities. The Chief Clerk of the Long Room5 holds a similar position with respect to the inside activities, which are performed by the computing clerks, cashier, manifest clerks, and others. In its essentials, the establishment of the custom house has not altered. Advances in commercial organization have led to some changes in procedure, and the large custom house of the present day favours a specialization of function. In the small establishment, however, one official may still be called upon to perform all the duties of collector, cashier, appraiser, computing clerk, and accountant. As will be seen later, this often leads to difficulty, especially as regards uniformity of treatment of imported commodities.

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I have previously indicated that a relatively large amount of tariff making was taking place in the Canadian provinces after 1791. It would be a mistake to assume, however, that the tariff-making bodies, particularly in the earlier part of this period, were the legislative assemblies. Although these bodies were able to apply some pressure to the tariff, as is suggested by the appearance of agricultural protection in the provincial tariff of 1843 (7 Viet., c. 1 and 2, Prov.), it was at the most sporadic, and at least until the winning of responsible government, most of the tariff-making power rested in the hands of the governor and the executive and legislative councils. Prior to Elgin's arrival in 1847, the provincial governors showed no disposition to hand over fiscal control to the assemblies. Interest groups, of which the merchants were by far the most articulate, were effective at times in influencing commercial policy, but it is noteworthy that they often by-passed the legislative branch of government in communicating their demands. Under these conditions, its is not surprising that the tariff did not emerge as a party issue until after responsible government had been achieved. This is not to say that there were no conflicts of economic interest. The Canadian merchants as a class supported the legislative assemblies in favouring a liberalized trade with the United States in most products. The executive council, on the other hand, clung to the old restrictions and in this supported the wishes of the merchants of Britain, who desired to hold the Canadian market as their special preserve. In Upper and Lower Canada, the legislative assemblies passed acts leaving the regulation of trade to the executive government, and as a result commercial policy was implemented largely by orders-in-council, and the administration of the Canadian customs was directed by regulations issued by the governor and his advisers. This situation is very much the same today, with an important difference, however. In the absence of responsible ministers at the head of clearly delineated departments of the public service, the civil secretary's office then performed the function of the present-day Department of National Revenue. It is, therefore, in the correspondence files of this office that one finds most of the rather small amount of information which has survived concerning the administration of the customs before 1840. Durham considered this method of administration inefficient and improper. Referring especially to Lower Canada, he wrote: The Civil Secretary's office is, in fact, the one general office in which almost every species of business originates, or through which it passes in some stage or other. . . . Every decision of subordinate officers is made matter of appeal, and no reference to the proper department satisfies the applicants, who imagine that they have a right to claim a personal investigation of every case by the Governor or the Civil Secretary.6

Customs collectors for the administration of provincial revenue acts were appointed by the executive, and, as in the case of Upper Canada (41 Ceo. Ill, c. 5, 1807, U.C.), power was given to the Governor-in-Council to add to the number of collectors as he saw fit. It was also stipulated that collectors appoint their own deputies. This suggests the kind of patronage system that prevailed. Public officials owed nothing to the legislative assemblies. "The officers of the Crown were not given a representative character even in theory, and unpopularity was a real recommendation for appointment at the hands of the

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Governor."7 Professor A. R. M. Lower remarks: "In the Canada of a century and a quarter ago, a government job meant dignity, security, and social status. For the masses it usually signified little work and much play—privilege and patronage. Administration was ineffective and unimaginative."8 Governors were generally opposed to the demands of the legislative assemblies for the control of patronage, and not infrequently they stated their case in terms which were obviously intended to suggest that they held to the Platonist ideal that the best shall serve the state: "He [Lieutenant Governor Metcalfe] objected, as he had always done, to the exclusive distribution of Patronage with party views, and maintained the principle that office ought, in every instance, to be given to the man best qualified to render efficient service to the State; and where there was no such pre-eminence, he asserted his right to exercise his discretion."9 In addition to this lack of co-ordination between the legislative and executive branches, there was a further lack of departmental responsibility on the part of the members of the executive council. As Durham pointed out: Of no one of these departments is there any responsible head, by whose advice the Governor may safely be guided. There are some subordinate and very capable officers in each department, from whom he is, in fact, compelled to get information from time to time. But there is no one to whom he, or the public, can look for the correct management and sound decision on the policy of each of those important departments. . . . There is no division into departments in the Council, there is no individual responsibility, and no individual superintendence. Each member of the Council takes an equal part in all the business brought before it.

On occasion, however, the legislative assemblies did assert themselves in matters respecting the customs administration, although not always with beneficial effect. It will be recalled that one of the causes of the breakdown of the customs union of Upper and Lower Canada was the refusal of the Legislative Assembly of Lower Canada, as the result of a quarrel with the executive, to appoint commissioners in 1819 to settle the question of the division of the customs revenues. The Assembly of Upper Canada appointed a select committee in 1835 to inquire into the state of trade and commerce in that province, and the customs department received criticism: The cost of collecting the duties levied on imports from the United States is unreasonably high; the system under which £100 can be retained for collecting another £100 being united to the powers vested in the Government to increase the number of collectors and ports of entry at pleasure, requires revision. From the official returns to the House, it appears that twenty Collectors of Customs collected last year £2117 and kept back £1059 out of it, for their trouble.10

This committee was followed by the first commission of inquiry into the public departments of Canada by Canadians. It is of interest to contrast the report of this commission, in its simplicity, with the report of the Royal Commission on Customs and Excise of 1927. The terms of reference, however, are strikingly similar and indicate that the problems of the customs administration had not changed in their essentials over the intervening years. The commission of 1839 was charged to inquire, "whether there be means of knowing that due diligence is observed by the respective officers in the collection of the duties on Imports etc., and also in punishing such persons as may be detected in attempts at fraudulent evasion of the Revenue Laws."11 Some of the conclusions drawn by the commission are especially noteworthy:

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If Imperial Acts prohibiting imports from the United States are to be enforced, a great change in the system of collecting the Customs of this Province would be imperatively required. (p. 104) No relief from those deficiencies can be obtained till the Legislature shall have decided on the expediency of incurring the serious expense necessary for a rigid enforcement of the law and punishment of those attempting to violate its provisions, (p. 110)

The commission recommended that a manual of instructions be issued to collectors, in order that port officers might be better acquainted with their duties. It also suggested that any changes to be made should be gradual, in order to avoid confusion. A rather startling recommendation for a solution along "free enterprise" lines was also made, namely, that the experiment be tried of farming the duties at one specially selected port of entry, in order to see whether this would result in a more diligent and effective service.12 Apparently the recommendation was not acted upon. By the time of the union of the two Canadas, the customs tariffs of these two provinces, which had diverged after the troubles of 1819, had again come together and were practically identical. The Customs Consolidation Act of 1841 formalized this identity, replaced the dual system by a single one, depositing the revenues in a consolidated revenue fund, and provided for a single Receiver General. An important change was made, however, in the fiscal arrangements of the new province. When Sir Francis Hincks was made Inspector General in 1842, he was admitted to the Executive Council, but he was also required to secure a seat in the House of Assembly. From this time on, revenue policy, and hence tariff making, was on a new footing. "By entrusting the Finance Minister with the responsibility of presenting and defending the financial policy of the administration it was proposed to preserve harmony between the executive and legislative bodies and thus to avoid the disputes which had proved so disastrous."13 This does not mean, of course, that Canada had achieved customs tariff autonomy. The dual British and Canadian control over the tariff and its administration continued for ten more years. It is clear, however, that the interior province was assuming a leading position among the colonies in customs matters, and this was to continue. At Confederation, both the tariff and the customs administration of the new dominion were, with relatively minor concessions to the Maritimes, those of the Province of Canada. THE ESTABLISHMENT What centralized departmental control there was over the customs administration was exerted for many years from the Quebec custom house. In the earlier days of the colony this custom house had dominated the St. Lawrence, and it retained its authority after the union of the Canadas. The Quebec Collector, J. W. Dunscomb, performed the duties of Commissioner of Customs, and after 1852 bore that title. He was given extra allowances for his supervisory services. There was also a small clerical staff in the so-called "Customs Management Branch," consisting in 1848 of a statistical clerk and two other clerks. A sum of £.420 was voted from customs collections for its maintenance.14 This management branch continued to grow in numbers and function, and before Confederation had developed into what is now called the "Inside Service" of the customs. In 1865 it had the following establishment: Commissioner; Assistant Commissioner and Accountant; Accountants Branch, 9 men; Corre-

THE CUSTOMS ESTABLISHMENT

59

spending Branch, 5 men; Statistical Branch. 10 men; Dominion Appraiser; Appraiser's clerk; messengers, 2 men. Keeping pace with the increasing departmentalization of the Inside Service, the ports themselves were becoming increasingly complex in their procedure. That the customs administration was already beginning to develop a "hardening of the arteries," associated with the growth of elaborate accounting devices within a bureaucratic system, is suggested by the number of books which were kept in the Montreal custom house in 1862: Long Room, 25; Shipping Office, 5; Examining Warehouse, 6, Surveyor of Warehouse Keepers, 12 in all, 7 kinds; Landing Waiter's Office, 6 in all, 3 kinds; Tide Surveyor's Office, 4 in all, 3 kinds; Chief Locker's Office, 3 in all, 3 kinds; Sampler and Weigher's Office, 3 in all, 2 kinds. The number of officers was thirty.15 Commissioner Dunscomb, in reporting to the Minister, remarked on this. After inspecting the port of Montreal, he referred to one officer as "a good and faithful officer, much attached to his book, and very unwilling to believe that his life has been lost in keeping a useless book."6 At the same time however, he reported adversely upon a storeman, who, in addition to being "neither drunk nor sober," kept no book at all. "I do not suppose there is another storeman in Montreal who does not keep a diary." Another officer, who kept hours of 9 to 10 A.M., not only had no book, but also no instructions as to what his duties might possibly be. Perhaps this officer was one of the large family which appears to have dominated, numerically at least, the personnel of that custom house at the time.17 Dunscomb also remarked, on a later occasion: "It strikes me that there is too much correspondence done in this Customs House. Officers are making letters and despatches inside, whilst the goods are left uncared for outside of the Customs House on the wharves and at the warehouses."18 Inspector Kavanagh made an almost identical report after inspecting the port of Gaspé Basin in 1866. Immediately after Confederation another Inspector, James Johnson, reported that the Maritime Provinces, and especially Nova Scotia, had developed a very faulty system with respect to books and returns. Each small outport had its own set of books, and in most cases, the sub-collectors, or "Deputy Treasurers," as they pretentiously called themselves, were incapable of keeping them in proper condition. "Low stipends result in collectors of honesty but no book-keeping ability."19 Presumably the inspector did not intend to suggest that high pay would result in dishonest but proficient collectors. To correct such difficulties the Province of Canada had altered its system before Confederation so that most of the book-keeping could be done in the ports themselves, and not in the outports. A survey of the number and location of the ports of entry indicates that the customs establishments of the British colonies in America were highly imperfect. At a time when the United Kingdom possessed over a hundred ports and more than two hundred outports or "creeks," there were less than a dozen custom houses in the North American provinces. In 1783 the only ports in Nova Scotia were Halifax and Shelburne. By 1789 there were ten places in that province at which collectors of provincial duties resided, but all ships still had to report to Halifax or Shelburne for clearance. Gradually more ports were established in the Bay of Fundy and in Minas Basin, and in 1839 the principal customs establishments were at Halifax, Liverpool, Yarmouth, Pictou, Sidney, Digby, Arichat, Parrsboro, Cumberland, Shelburne, and Lunenburg. Owing to the very difficult nature of the coastline, outports were also added and placed

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under the jurisdiction of the nearest customs ports. In New Brunswick there was a custom house at St. John in 1762, and St. Andrews was made an outport the following year. The inland province had an establishment which was based almost exclusively upon the St. Lawrence. Quebec was the great port of entry, and its custom house dominated the whole establishment. The first Collector and Controller were appointed at Quebec in 1762, and Montreal was made an outport at the same time, with a Surveyor in charge, and a combined Waiter and Searcher to assist him. Montreal did not achieve the status of a port until 1831. Apart from St. John's the only other custom houses in Canada East as late as 1847 were at two outports, Gaspé and New Carlisle. The maritime mercantilist tradition dominated, and control was attempted by a tenuous system based on naval supremacy, with indifferent success. Tariff authorities recoiled before the expense of administering, on land, a vast, sparsely settled customs area. Because of geography, the customs establishment has been affected by the same problem of overhead costs that has affected most of Canada's economic institutions. Upper Canada adopted the custom house with understandable reluctance. For the most part, her merchants were mercantilists with respect to the seaboard and free traders with respect to the interior. Not only did they obtain much of their consumer goods by way of New York and the Great Lakes, but they also performed an entrepôt function between the American West and the St. Lawrence route. In addition, they were justifiably alarmed at the administrative expense and difficulty that would surely be involved in any attempt to control the American frontier. This position and point of view had been fostered by the dichotomous nature of British policy with respect to Canada and her commercial relations with the United States. The logic of mercantilism would have denied such intercourse, . . . but fortunately, in the case of the inland commerce, common sense prevailed and, except for the prohibition of American vessels in the lower St. Lawrence, interference with the intercourse between the two countries was slight. Interference would have been short-sighted for it would have brought fiscal retaliation and the loss of the American western market. On the coast the case was different and there was waged a long and dreary war.20

However, Upper Canada was forced to recognize the existence of her customs line after the British-American Treaty of Amity and Commerce (Jay's Treaty) which, while legitimizing trade with the United States, also had the effect of putting an end to free trade in the interior. The treaty was intended, however, to establish a trade thought to be appropriate to local conditions,21 and it permitted articles not specifically prohibited to be imported free of duty. Lower Canada wished Upper Canada to enact such legislation as would create a homogeneous customs area of the two provinces, but the upper province was able to show the "unwisdom" of risking retaliation, and the formidable costs that would be entailed. The United States took a similar attitude, and failed to take advantage of her commercial possibilities in the West—"a curiously feeble policy."22 When, at last, American custom houses were established on the border in 1799, Upper Canada capitulated, and by an act of 1801 (41 Ceo. Ill, c. 5), eleven ports of entry were created, at Cornwall, Johnstown, Newcastle, York, Kingston, Niagara, Queenston, Fort Erie, Turkey Point, Amherstburgh, and Sandwich.

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61

The location of the custom houses of Upper Canada indicates the nature of the problem of customs administration in that province. It has a water frontier, consisting of lakes connected by narrows. The transport of merchandise across the narrow sections could be effected by small boats and ferries,23 while the lakes were traversed by inland shipping of a somewhat larger type. The administration had to meet the problem of both these kinds of communication. The importance of the narrow water passage in the Niagara area was recognized by the establishment of three out of the original eleven custom houses along that frontier. The eastern narrows were similarly stressed, while Sandwich was supposed to control the less populous western area. The revenue was protected on Lakes Ontario and Erie by ports at Newcastle, York, and Turkey Point. By 1840 the list of Upper Canada ports of entry had grown to thirty-five, their location still reflecting the importance of water transport. Custom houses at such points as Port Colbourne, Port Dalhousie, Penetanguishene, and Trent Port suggested the importance of the canal. With the rise of railway transportation an important redistribution of custom houses became necessary, since the railway tended to concentrate the frontier traffic at a few points, rendering the administration of the customs on the frontier an easier task, and internal specialization feasible. However, the railway also gave rise to a new situation A system of bonding goods to interior points which is administratively feasible under the conditions of railroad transportation makes it unnecessary to completely process importations at the border point of entry. The principal machinery of the customs establishment can be set up at any interior point which is commercially important. The customs port of Toronto, for example, no longer owes its importance to the fact that it is situated on the water frontier between Canada and the United States. It is a lake port of some significance, but most of the goods passing through its custom house have been transported, largely by rail, from east and west coasts, and from the American frontier points at both ends of the lower Great Lakes. Of the 74 customs offices in Ontario today, no more than 10 can be considered to be frontier ports, and only half of that number are of special importance. The rise of the railroad was accompanied by the decline of the older forms of lake shipping. The custom house has as a result moved away from the lakes. Of the Ontario ports listed in 1840, the following are absent from the current list: Bath, Burlington, Chippawa, Hallowell, Maitland, Niagara-on-the-Lake, Newcastle, Oakville, Penetanguishene, Port Credit, Port Dalhousie, Port Talbot, Queenston, Rivière aux Raisins, and Turkey Point. Port Burwell, Port Dover, and Port Stanley have been reduced to outports. In the other provinces also, the coming of the railroad reduced much of the frontier traffic to points of concentration; but the coming of highway transportation tended, for a time, to again disperse the customs establishment where there was a land frontier, and this has resulted in serious problems of control in parts of Quebec and the western provinces, lesser ones in Ontario and the Maritimes. The application of the bonding system to highway truck transport is again, however, having the effect of concentrating the processing of commercial shipments in larger centres in the interior of the customs area. Air transportation has already made imperative other changes in location and may result, ultimately, in fundamental changes in custom house procedure. The cost of administering the customs had first claim on the consolidated revenue fund which had been set up in 1840. This cost was calculated only

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on the basis of salaries and of contingencies such as rent, fuel, and office supplies. Where custom houses were built by the government, their cost was not included, but was charged to the capital account of public works. Montreal possessed a government-owned custom house building in 1838, which cost £4,500 and was thought much larger than was necessary for the time; it apparently reflected a business optimism which was untroubled by premonitions of the commercial tragedies that were to befall the St. Lawrence system ten years later. By contrast, the custom house at St. Andrews, N.B., was described as "a dilapidated wooden building, neither wind nor water tight, not in any way secure, merely Venetian blinds at the windows.... No allowance for office rent or fuel. The building belongs to the collector who was obliged to purchase it from the heirs of the late Deputy Treasurer."24 Obviously there was lack of uniformity in the matter of premises and contingencies, and a lively trade in real estate on the part of collectors. The Surveyor at Sandwich wrote the Inspector General in 1861, asking for an office on the wharf. He had been using the saloon as his place of business, but this saloon was unfortunately not always open.25 The problem of arriving at the cost of the customs establishment is complicated by the fact that the customs department shared premises with the excise, and often with the post office, as much later it was to share them further with the income tax. There appears to have been no internal accounting procedure to ascribe costs to individual departments in accordance with the space they occupied. An attempt to establish completely satisfactory cost figures under such conditions is not likely to be fruitful, and therefore those figures which are provided by the old tables of trade and navigation are offered without further explanation. Between 1849 and 1857, selecting this period as a sample, costs of collection were as follows, according to the Tables by Trade and Navigation of the Province of Canada: Year

Gross duties

1849 1850 1851 1852 1853 1854 1855 1856 1857