The purpose of this memorandum is to report upon the recent developments in connection with the overall shortage of freight cars which have prompted the Director of Defence Transportation in the U.S.A. to threaten an embargo on coal shipments to Canada to become effective on August 5th.

2. The difficulties arising from the shortage of freight cars do not constitute a new problem, but they have become more critical during this season of large freight movements. In mid-June Canadian authorities were asked by the Office of Defence Transportation to reduce the number of U.S. cars in Canada. This was followed by a notice, received through diplomatic channels, on June 26th, to the effect that an embargo would be placed on coal shipments at midnight of that date. Representations were made to the U.S. State Department, whose intervention prevented the order from going into effect at that time and since then negotiations have been in progress and steps have been taken to improve the situation. The Canadian railways were asked by the Minister of Transport to take what action they could to relieve the situation, and between June 14th and July 27th, the adverse balance against Canada (i.e., the difference between U.S. cars in Canada and Canadian cars in U.S.A.) was reduced from 17,967 to 9,450.

3. Despite this general improvement, which the Director of Defence Transportation claims has been brought about to a considerable extent by the retention in the U.S. of Canadian box cars rather than the return from Canada of "open tops", the U.S. authorities have stated that, if the adverse balance is not reduced to 8,000 cars by August 5th, an embargo will he placed on coal shipments to Canada until such time as the target figure is reached. It is understood that the necessary executive authority has been secured for this action and it is the opinion of the State Department and Canadian officials concerned that the implications of such action have been fully considered and that they are prepared to carry out the threat.

4. The situation has recently been reviewed by Canadian government and railway officials. The latter claim that the Canadian railways are making a real effort to relieve the situation within the limits of accepted railway practice; i.e., they are not returning the cars empty. The Canadian National Railway, which is a larger factor in this than the Canadian Pacific Railway, has instituted additional measures, such as stock piling coal within the border and the re-routing of traffic (at higher cost) to make for shorter hauls in Canada but the effect of these measures will not be felt until about August 10th. They see no possibility, however, for the target figure to be met by August 5th and, in their opinion, the adverse balance is unlikely to fall below the present figure of 9,500 by that time. Moreover, it is their view (and one which is shared by government officials) that the freight car balance should be related to traffic volume and that in the season of large movements, an adverse balance of 10-11,000 is more reasonable than the 5,000 originally suggested by the U.S. authorities and later modified to 8,000. They express some suspicion that the U.S. are facing a box car shortage and that they are using the present coal car shortage as an excuse to hold Canadian box cars. Should this trend continue the railway authorities here say that available box cars for the Autumn movement of wheat and fruits will fall far short of requirements. If the embargo comes into effect, it would probably take three or four days to reach the level demanded by the Office of Defense Transportation since cars are being returned at the rate of 500 a day. The Canadian officials concerned with this matter point out, however, that this action would tend to complicate rather than solve the problem. They favour cooperative arrangements designed to meet the problem over a long period.

5. During the negotiations with the Director of Defense Transportation many arguments were advanced in an attempt to dissuade him from putting the embargo in effect. He was reminded that Canada was the best customer for U.S. coal; that his action offered no real solution to the problem; and that in the past the situation has been reversed (an adverse balance against the U.S.) and at that time Canada took no such drastic action as that now contemplated. It was also indicated to the Director that if he went through with the action he proposes the Canadian authorities here might feel compelled to issue a public statement on the Canadian position. The Director, on the other hand, has produced inspectors' reports to show that Canadian railways have misused U.S. freight cars. This is acknowledged by the Canadian railways who claim, however, that if they employed inspectors in the U.S.A. similar evidence could be produced. They claim, however, that this is supervised as strictly as is possible and that the cars are not misused on a scale which would affect the overall picture.

6. The coal controller has been consulted informally and he has given it as his tentative opinion that a coal embargo of short duration (three or four days) would not have any very serious effect on the economy of the country.

7. In the light of this situation the Cabinet may wish to consider whether representations should he made to the U.S.A. at the highest level; whether discussions should he renewed with the Director of Defense Transportation; or whether the problem should be regarded as one for further consideration by the railroads rather than the government. If the second or third courses are followed, there seems little doubt that the embargo will be put into effect.

A.D.P. HEENEY
Secretary to the Cabinet