by Tracey Rothstein
Manitoba History, Number 18, Autumn 1989
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This essay won third place in the senior high category of the 1988 “Young Historians” competition. It was written by Tracey Rothstein, then a grade 11 student at St. John’s Ravenscourt.
“Canada was in stagnation, touching the bottom of one of the most severe recessions of that era.” [1] This refers to the Great Depression between 1873 and 1896. The end of the Depression marked the beginning of the wheat boom in Canada which scatted in 1896 and declined in 1913. Statutory freight rates on grain, applied by the Government of Canada to export grain and related products, contributed to this time of economic prosperity. They represented a fixed and inviolable commitment on the part of the Canadian Government to protect the western grain producers from higher transport prices and helped them maintain an international competitive position. This worked relatively well until conflicts arose during the First World War, and the statutory grain rates became a subject of great controversy in Canada.
The federal government had various goals in mind when entering into the Crowsnest Pass Agreement of 1897. It wanted to promote the development of the mining area of southern British Columbia. By doing this, it felt it could integrate this area into the Canadian economy despite geographic differences and American influence. The government felt that lower freight rates on the movement of grain and other products would enlarge the prairie and inter-mountain markets for eastern manufacturers. It also felt that the assurance of lower rates on grain arid on the inward movement of capital equipment would promote agricultural settlement and general economic expansion of the West. The government wanted the Canadian Pacific Railway Company to accept the principle of government rate control in the national interest, without reference to the level of railway earnings.
The Canadian Pacific Railway (CPR) had reasons, including economic advancement and expansion, in mind when it entered the Crowsnest Pass Agreement in 1897. It observed that the subsidy offered by the Laurier government would pay more than one half of the cost of the Crowsnest line, unlike the previous subsidy offered by the Conservative government. It saw that the construction of a line from Lethbridge to the Kootenay area of British Columbia would entitle the CPR to a large land subsidy, indirectly from the Province of British Columbia. This line, it thought, would provide a beneficial rail link from the CPR’s main line to the Kootenay region. It would then be possible to prevent American occupation of that wealthy area. It would also secure the traffic benefits from the economic development in the Southern Cordillera. The CPR saw a promising future in entering the agreement in 1897.
In 1897, then, the CPR and the federal government entered into a mutual agreement. The government granted the CPR a subsidy of $3,404,720 for aid in building a line from Lethbridge, Alberta through the Crowsnest Pass to Nelson, to reach the Kootenay region of British Columbia. Large land grants were also given to the railway from the government. In return for these provisions, the CPR agreed to reduce its rates on two general commodity movements important to the development of the Prairies. The first was given the title “Settlers Effects” which were transported from central Canada to settlers on the prairies. These westbound products included coal oil, binder twine, agricultural implements, household furniture, etc. The second commodity stated in the agreement was grain and flour moving eastward to Fort William and Port Arthur. The rates on these goods were reduced by three cents per hundred pounds below the levels of 1897. The railway undertook, in return for the subsidy, “that no higher rates than such reduced rates or tolls shall be hereafter charged by the company.” [2]
At the time the agreement was made, neither the government nor the CPR could have foreseen problems in the new system. Inflation was not a part of their experiences, therefore, the perpetual nature of the agreement did not seem to pose a conflict in 1897.Over the years, distinct advantages and disadvantages of the Crow Rates have been observed. The federal government believed that the low rates of grain had undesirable economic effects on the West’s agricultural industry, the grain handling and transportation system, and the economy as a whole. It believed that these rates retarded the economic development of Western Canada because they penalized livestock production. Another consequence of the low freight rates was that the major railways, CP and later Canadian National, faced a cost problem in carrying the grain. The results of this were a deterioration in the quality of rail service provided for grain shippers and in the physical state of the grain transportation system in Western Canada. [3] The other side of the issue was represented by prairie grain producers, their organizations and the prairie provincial governments. They felt that they would be in jeopardy if the statutory grain rates were removed. They felt it would affect the competitive position of prairie grain exports, the production of prairie grain, the incomes of grain producers and the rural economies of the prairies. [4] The Crowsnest Pass Agreement was only in effect for seven years before the Manitoba government requested a change. The rates were lowered even further in response to the “Manitoba Agreement” of 1903. Under this agreement, the Manitoba government leased several bankrupt railway systems to the Canadian Northern Railway. They also guaranteed the CNR’s bonds for the construction of a rail line to Lakehead. In return, CNR was to reduce grain freight rates up to four cents per hundred pounds. The CPR voluntarily matched the rate cuts for competitive reasons.
In 1919, the rate limitations of the agreement were suspended and rates were allowed to rise above the 1897 levels. The Railway Commissioners permitted this because a costly wage settlement had been imposed on the railways and they needed extra revenues to pay the costs. This was a period of sharp inflation due to the pressures of the First World War. As a result of changed economic circumstances, the War Measures Act suspended the Crowsnest Pass rates.
This suspension only lasted for four years. In 1922, the Crowsnest Pass rates were restored only for grain and flour. This was due to a substantial drop in grain prices and a minority government situation. In 1924, the rates for the other commodities were restored. At first, the rates were only back for the original 289 prairie points of 1897. By 1925, this number had grown immensely. Not only did the government put the Crowsnest Pass rate levels of grain into the Railway Act as “statutory grain rates,” but it also extended their application to all shipping points then in existence, or any yet to come in Western Canada. For the time, the rates of westbound commodities were not specified, therefore became non-statutory rates. But, in 1927, the Crow Rates for grain and flour were extended. They applied to westbound export grain shipped to the Pacific Coast. The higher rates on the branch line shipping points were also reduced. In 1961, two more items were added to the list: rapeseed and flaxseed.
The railways were experiencing a growing economic crisis in the grain handling and transportation system which was provoked by the existence of statutory grain rates. To aid them in this uneconomic time, the federal government began a program in 1972 to purchase and control new hopper cars for the railways. In 1974, the federal government and the railways began a cost-shared program to repair over 7,400 box cars to continue the service of grain. In 1979, the Canadian Wheat Board purchased 2,000 hopper cars at the producers’ expense, Alberta and Saskatchewan each purchased 1,000 hopper cars and Manitoba acquired 400 cars on a short-term lease. In total, by 1981, the federal government purchased or leased 10,000 hopper cars. In addition to this, in 1977, the federal government began an upgrading and rehabilitation program for the lines in the basic branch network at the time. [7]
A lot of this compensation was a result of the Snavely Commission. In 1975, the Commission on the Cost of Transporting Grain by Rail headed by Carl Snavely, a transport economist from Washington, D.C., was appointed to determine the costs and revenues associated with the movement of statutory grain during 1974. This study found an answer to the question of whether or not the railways were losing money hauling statutory grain. They concluded that the railways suffered a gross revenue shortfall of $157.39 million in 1974. The producer paid 38% of the total cost of the railways in the movement of statutory grain, the Federal Government paid 24% and the railways absorbed 38% in uncompensated losses. Between 1974 and 1977, this shortfall increased due to the increase in volume of grain transported and the high inflation which the railways experienced. However, these increases were balanced by the rail-ways’ increased productivity, as reported by Snavely.
In 1982, Dr. J. C. Gilson was instructed by the Federal Government to lead a consultative process, due to the intense lobbying of a number of farm organizations. Their duty was “to recommend a common set of principles and a clear and workable framework for a new and comprehensive approach to the western grain transportation system.” [8] Some of these principles were as follows: to establish an effective statutory framework, a commitment by the federal government to pay the 1981-82 railway revenue shortfall, and to share future costs with the grain producers. The railways were requested to provide performance and service guarantees and promote increased efficiency. The federal government was to pay for branch line rehabilitation and the purchase of new hopper cars.
When wartime price controls were lifted in 1946, the railways found statutory grain traffic to be a burden. They encountered financial difficulty because of rising operating costs. It was not until 1960 that losses for carrying grain were recognized by the MacPherson Royal Commission on Transportation. This commission was appointed in 1958 by Prime Minister Diefenbaker to examine problems relating to railway transportation in Canada and inequities in the freight rate structure. These were a result of the poor financial position of both the CPR and the CNR due to escalating operating costs. The CPR was willing to recognize the importance of freight rates to the western economy, and therefore wanted the federal government to either grant it corporate income tax concessions or to make direct subsidy payments to the grain producer. However, neither the grain producer nor the railway wanted to receive a direct subsidy payment because of the reputation attached to it. The CPR wanted to maintain its image as a private corporation, and the farmers were concerned about retaining the public image of grain production as an economically self-sustaining industry.
The MacPherson Commission reached the conclusion that “the shortfall of revenue on variable costs in 1958 was of the order of $2 million for the CPR and $4 million for the CNR.” [5] Therefore, the Commission recommended that each railway be granted annually a sum of money equal to the shortfall of revenues on variable expense. In addition to this, the CPR would be granted $9 million and the CNR $7.3 million to cover their fixed costs.
The MacPherson Commission was given no Parliamentary consideration by the federal government until 1967 when Canada’s National Transportation Act was passed. But the MacPherson Commission’s recommendations on grain were not put into the new act. This was because major improvements in the grain handling and transportation system were in progress. Thus, Parliament expected further improvements and felt that statutory freight rates would be profitable.
The National Transportation Act however, provided the railways with a “general subsidy called normal payments which totalled $110 million in 1967 and decreased by 12.5% per year thereafter, until they were exceeded by the sum of new specific subsidies.” [6] The new specific subsidies were to be provided by law in three areas: at-and-east export grain rates, passenger services and branch lines. The branch line subsidies were granted to branch lines essential to the public that were providing unprofitable transportation services. The new specific subsidies did not come into force until 1970 for the CPR, and 1971 for the CNR.
When the Gilson Report was submitted to the federal government, there was some controversy about to whom the “Crow Benefit” [see the Western Grain Transportation Act (WGTA)] should be paid, the producers or the railways. During negotiations, the government ultimately decided to adopt the payment-to-the-railway approach set out in the WGTA.
The WGTA was passed by the House of Commons on November 14, 1983, and became effective on January 1, 1984. The Act launched a new era in Western grain transportation rates. However, as recognition for the fact that grain producers were now committed to paying higher freight costs, the Act included a number of features to promote and enhance rail service and efficiency in the movement of grain.
The Act established the Grain Transportation Agency Administrator. The Administrator has a number of responsibilities, including the estimating of grain tonnage forecasts, the setting of grain transportation performance objectives, monitoring the performance of the railway companies and generally ensuring “that the grain transportation system is efficient, reliable and effective with the objective of maximizing returns to the producers.” [9]
Because the efficient movement of grain is in the interest of both railways and users, a committee known as the Senior Grain Transportation Committee consisting of representatives of shippers, railways and other transportation modes was established. [10] The SGTC advises and makes recommendations to the Administrator and to the Minister of Transport on matters involving transportation performance objectives, measures to improve the capacity and efficiency of the grain transportation shipping and handling system and the allocation of railway cars for the movement of grain. [11]
Due to the number of government-owned railway cars, Section 33 of the WGTA provides that the Minister of Transport, through the Grain Transportation Agency Administrator, may administer and control the operation and use of government cars. [12]
Part II of the Act deals with rates. Rates are based on the railways’ costs of moving grain and are intended to cover the railways’ variable costs plus a contribution of 20% towards the railways’ non-variable or constant costs. [13] Both variable and constant costs contain a component representing cost of capital or profit. Therefore, the movement of grain has become a profitable business for the railways for the first time in many years.
Rates are adjusted each year based on changes to the railways’ costs. These annual changes generally reflect only inflation and volume. [14] Every four years a thorough costing review is carried out taking into account productivity changes and detailed costing changes. [15]
Rates under the WGTA now cover the full costs of “grain dependent branch lines” [16] which previously had been subsidized under the branch line subsidy provisions of the Railway Act.
Rates are based on a distance scale and are similar to the one under the old statutory rate scheme. [17] The rate levels are approximately five to six times the former level. However, as an incentive for the grain producers not to object to the new legislation, the government provided for a “Crow Benefit,” which is a government payment equal to the difference between what the producers paid prior to the WGTA and the rate levels introduced by the WGTA. [18] In effect, the government is assuming the increased costs initially. However, as inflation raises the costs, the producers share of the required payment of rates to the railways will increase. At the present time, producers pay approximately 25-30% of the total, with the federal government paying the balance.
Grain rates have been one of the most controversial economic and political issues in Western Canada for the last 100 years. Land locked shippers who were subject to the monopolistic practices of the CPR in rate making were first accommodated by the Crowsnest Pass Agreement of 1897. They were then under the influence of the statutory amendments to the Railway Act in 1925, which froze the level of grain rates. As long as the railways were profitable in moving grain, the legislation succeeded in protecting producers and adequately compensating railways.
Productivity improvements helped to balance inflation, but by the 1950s, the railways were losing money, as reported by the MacPherson Commission in 1961. Although the MacPherson Commission recommended that the railways be compensated for moving grain, the government did not adopt that recommendation when enacting the National Transportation Act in 1967. Instead, in recognition of the railways’ losses, the government adopted a number of “special case” measures, including branch line subsidies and the provision of hopper cars. However, the railways were losing so much money by the late 1970s that their plants were deteriorating and they did not have the funds to invest in the required capacity increases. Through a series of investigations, climaxing with the Gilson Report of 1982, consensus was finally reached that the railways adequately be compensated for movement of grain. The result was the Western Grain Transportation Act which not only provides for increased grain rates, but also for efficiency and service improvements for the benefit of the producers who will, over future years, be paying those increased rates. There is a cost in moving grain, and sooner or later that cost must be paid.
1. R. Sokal, E. Tyrchniewicz, Statutory Freight Rates on Grain: Background and Economic Effects, (Winnipeg, 1979), p. 4.
2. H. L. Purdy, Transport in Canada - Competition and Public Policy, (Vancouver, 1972), p. 179.
3. Sokal and Tyrchniewicz, Statutory Freight Rates on Grain, pp. 1 & 2.
5. Joseph Hanley, An Historical Analysis of Railway Export Grain Rates and the Crowsnest Pass Agreement on September 6, 1897, (Quebec, 1981), p. 42.
6. Sokal and Tyrchniewicz, Statutory Freight Rates on Grain, p. 10.
7. J. C. Gilson, Western Grain Transportation - Report on Consultations and Recommendations, (Ottawa, 1982), pp. 8 & 9 (II).
8. E. Tyrchniewicz, Western Grain Transportation Initiatives: Where do we go from here?, (Winnipeg, 1984), p. 6.
9. The Western Grain Transportation Act of 1984, Section 17(2).
13. Ibid., Sections 34 and 36.
17. Ibid., Sections 35 and 36.
18. Ibid., Sections 37, 54 and 55.
