The Great Depression in Canada: causes, policy, and economic impact

Great Depression of the Early 1930's In Canada

The central concern of this paper was to provide an overview of the main causes of the Great depression as they specifically relate to the Canadian situation. The main question of the paper - could the impact of the economic upheaval in Canada been lessened by a different use of policy? - was also a central of focus. Research was conducted in order to firstly understand and clearly represent the major underlying causes of the Depression; and secondly to ascertain, through research, the extent that internal and external factors played in the Canadian economic depression.

Research for this paper was sourced from a wide range of databases and libraries. Some of the most succinct were from Internet sources. The data obtained from online sources was supported by journals and books which added and deepened much of the online information.

An excellent overview of the effects of the Depression, as well as providing in-depth insight into the causes, was the article (online) by James Struthers, entitled the Great Depression. The article dealt with the cardinal issues and causes and provided a valuable starting point for further research. Another good Internet source that provided some basic analyses of the situation was Encyclopedia: The Great Depression in Canada at Nationmaster.com. This provided a very concise but useful overview. The Internet research was expanded on by research into various libraries and journals.

Various journal articles provided more in-depth material particularly about the causes of the Great depression. Very helpful in this regard was the Macroeconomics of the Great Depression: A Comparative Approach by Ben S. Bernanke. This article provided detailed information as to the underlying economic factors which precipitated the Depression. A very perceptive book that was also consulted as background was the Global Impact of the Great Depression, 1929-1939 by Dietmar Rothermund.

These books and journals were supported by various official sources on the Canadian experience during the Depression. For example, the Canadian Economy Online (http://canadianeconomy.gc.ca/)provided a plethora of good information on the Depression years. There were also numerous other sources that provided valuable insight into the central problem of the paper. For example, the journal article, Class, Crisis, and Political Ideology in Canada: Recent Trends, by Doug Baer, et all in the Canadian Review of Sociology and Anthropology, Vol. 24, 1987, provided insight into the direct effects and causes of the depression in terms of the inequality.

Much of the research was obtained online as the sources were usually of good quality and tended to summarize important issues that could be expanded in the books and journals. The research undertaken led to the conclusion that the causes of the Great depression, while intricate and complex, were largely due to economic inequalities and the imbalances between supply and demand. The research also made it clear that internal and policy decision in Canada had a definite impact on the early years of economic depression in the country.

1. Introduction

The Great Depression has been described as one of the most significant events of the twentieth century which had a profound effect on ordinary people as well as on national economies worldwide. Ordinary citizens in countries like Canada were affected through the loss of employment and property. Scholars and researchers of the depression years state that Canada was one of the countries where the effect of the Depression were most acutely felt, partly due to the fact that there was almost no social welfare system in place at the time. The town of Vaughn in Canada is an example. While the economy of the town was essentially agriculturally based, and the effect of the Depression was not as extreme as other Canadian urban centers, nevertheless, this area was also severely affected. "...with the situation growing so grim by the early 1930's that Township Council was compelled to implement a welfare system for providing money, food and clothes to residents who were unable to support themselves. " (Vaughn)

The depression caused Canada's Gross National Expenditure to decline by 42% between 1929 and 1933. (Struthers, J.) by 1933 there was large scale unemployment in the country. "...30% of the labour force was unemployed, and 1 in 5 Canadians became dependent upon government relief for survival." (ibid) There were also various factors that exacerbated the economic situation for Canadians during this period. As mentioned, one of these factors was the almost non-existent welfare system as well as errors in government policy.

The essential real causes of the depression are twofold. Firstly, the larger external causes of the depression and secondly inadequate and ineffective government policy at the time that led to and increased the severity of the situation. Both these aspects will be dealt with in this paper. It is also the intention of the essay to show that the internal and external causative factors were inextricable intertwined and that there was no single or simplistic cause of the depression in Canada.

2. General Causes of the Great Depression

The Great Depression was "the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade." (Gusmorino P.A. 1996) While the ostensible reason for the Depression was the Wall Street stock market crash which precipitated a decline in all the world markets, yet there are many factors that must be taken into account in analyzing the general causes of the Great Depression. In many counties, particularly Canada, the economic slump had it origins in both external as well as internal facets, such as government and Fiscal policy at the time. For example, "Many Canadians of the thirties felt that the depression wasn't brought about by the Wall Street Stock Market Crash, but by the enormous 1928 wheat crop crash." (Great Depression of Canada)

One of the central causes of the Depression and the stock market crash was the misdistribution of wealth, particularly in the Unites States during the 1920's. A second factor was the stock market speculation towards the end of that decade.

The unequal distribution of wealth existed on various levels in the society and there was a disparate and severely unbalanced distribution of resources. Possibly, as many commentators suggest, the essence of the complex reasons for the eventual economic decline in the United States which was to have such devastating impact on the rest of the world, was the imbalance in resources and in the natural balance between supply and demand at that time. "Money was distributed disparately between the rich and the middle-class, between industry and agriculture within the United States, and between the U.S. And Europe." (Gusmorino P.A. 1996) While this imbalance was not as extreme in Canada, yet it was to have a profound effect on the Canadian economy in the late nineteen-twenties.

This imbalance in wealth was to result in an unstable and precarious economy. This factor, combined with the speculation that occurred in the latter part of the decade, was to be the cardinal reason why the stock markets were artificially high. This false economic situation and the instability that was created, led to the stock market crash which was to engender the worldwide economic depression.

The so called "roaring twenties" are therefore an important era in understanding the causes of the Depression. The United States was extremely prosperous during this period with realized income rising from $74.3 billion in 1923 to $89 billion in 1929. (Hicks, J.D. p.110) as many researchers point out, this increased wealth was not shared equally among the citizens and workers in the United States. This imbalance was to grow and to have serious consequences in the years that followed,

According to a study done by the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%. That same top 0.1% of Americans in 1929 controlled 34% of all savings, while 80% of Americans had no savings at all. (Gusmorino P.A. 1996)

An obvious example of this misdistribution of wealth was that of Henry Ford, the founder and owner of the company that dominated the Automotive Industry. "Henry Ford reported a personal income of $14 million4 in the same year that the average personal income was $750." (ibid)

Examples like this became more prevalent and the inequity of wealth became more predominant throughout the late years of the 1920's.. "While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable income." (ibid)

One of the central reasons for the misdistribution of wealth was the increased manufacturing output during this time. This resulted in the fact that while average output in manufacturing increased by 32% during the period form 1923 to 1929, the average wages for workers increased by only about nine percent. Therefore most of the profits were directed not to the society in general but to corporate profits. "the bulk benefit of the increased productivity went into corporate profits. In fact, from 1923-1929 corporate profits rose 62% and dividends rose 65%." (McElvaine R.S. p. 39) This is further evidence not only of the inequality of general wealth distribution, but also of the severe imbalance that was to create havoc in the economy.

This dilemma was also further exacerbated by the fact that the Federal Government encouraged this situation. For example, President Coolidge signed the Revenue Act of 1926, which in effect reduced tax for the wealthy. "... he was able to lower federal taxes such that a man with a million-dollar annual income had his federal taxes reduced from $600,000 to $200,000.. Even the Supreme Court played a role in expanding the gap between the socioeconomic classes. " (Gusmorino P.A. 1996)

This situation was further worsened by another imbalance, namely the disparity between supply and demand. This was to have far-reaching and damaging effect on the economy and was directly related to inequalities in wealth distribution. " for an economy to function properly, total demand must equal total supply. In an economy with such disparate distribution of income it is not assured that demand will always equal supply." (ibid)

In effect this was to lead to a surplus of goods and products. The surplus of goods in themselves were not the problem but rather that "those whose needs were not satiated could not afford more, whereas the wealthy were satiated by spending only a small portion of their income." (ibid)

Another factor that was to lead to the crisis was the increase in purchasing; this was to initiate the practice of buying on credit for those who did not have immediate purchasing power. Credit buying become fashionable and "By the end of the 1920's 60% of cars and 80% of radios were bought on installment credit. Between 1925 and 1929 the total amount of outstanding installment credit more than doubled from $1.38 billion to around $3 billion." (ibid)

This strategy created artificial demand for products which people could not ordinarily afford. It put off the day of reckoning, but it made the downfall worse when it came. By telescoping the future into the present, when "the future" arrived, there was little to buy that hadn't already been bought. In addition, people could not longer use their regular wages to purchase whatever items they didn't have yet, because so much of the wages went to paying back past purchases.

There are also numerous other causative aspects that could be mentioned and expanded on. One of these is the imbalance in industry. The imbalance in wealth meant that only a few industries were almost completely dominant in the economy. In the United States these were the automotive and radio industries. This in turn meant that if these industries were to be negatively affected, then the entire economy would be affected. This was what was eventually to take place. "When the automotive and radio industries went down all their dependents, essentially all of American industry fell. Because it had been ignored, agriculture, which was still a fairly large segment of the economy, was already in ruin when American industry fell. (ibid)

In summary the Great Depression was caused by numerous factors which led to the resultant stock market crash. This had a concomitant effect on confidence and spending relationships within the economy. Once the rich stopped spending and the credit limits of the middle and poorer classes were exhausted, then industrial production fell. With the resultant market crash jobs were lost and many problems were forced into a situation where they began defaulting on their interest payments. "...Unemployment grew to five million in 1930, and up to thirteen million in 19324. The country spiraled quickly into catastrophe. The Great Depression had begun." (ibid)

The core reasons for this situation are summarized as follows.

The core of the problem was the immense disparity between the country's productive capacity and the ability of people to consume. Great innovations in productive techniques during and after the war raised the output of industry beyond the purchasing capacity of U.S. farmers and wage earners. The savings of the wealthy and middle class, increasing far beyond the possibilities of sound investment, had been drawn into frantic speculation in stocks or real estate. The stock market collapse, therefore, had been merely the first of several detonations in which a flimsy structure of speculation had been leveled to the ground.

The Great Depression)

There are of course many other complex factors, such as the problem of the gold standard which played a major part in monetary causes of the Great Depression. However an explication of these causes is outside the range of the present topic.

THE CAUSE of the DEPRESSION)

There were also numerous aspects of governance and government policy that worsened and situation for the Canadians. Some theorists and historians argue that much more could have been done by the government of the time to reduce the impact of the Depression. As mentioned, Canada's welfare system was not adequate to the task that faced it during the Depression years. There were many other problematic areas that were created due to policy and government that caused further harm to the economy and the people. One of these aspects that were very damaging was the government's inability and refusal to help with the very high unemployment problem.

Although unemployment was a national problem, federal administrations led by the Conservative R.B. Bennett (1930-35) and the Liberal W.L. Mackenzie King (from 1935 onwards) refused, for the most part, to provide work for the jobless and insisted that their care was primarily a local and provincial responsibility. The result was fiscal collapse for the 4 western provinces and hundreds of municipalities and haphazard, degrading standards of care for the jobless.

Local government refused to help single, homeless men between 1932 and 1936. This resulted in the federal government establishing unemployment relief camps. These were run by the Canadian department of defense. (ibid) This was to result in numerous protests and riots in the camps.

Conclusion

The Canadian situation during the Great Depression was coterminous with the economic and related social event that occurred in the United States. The causes of the Canadian experience during 1929 to 1939 were therefore directly related to the larger issues that affected the international economy.

However Canada was also a country that was to a great extent dependent on exports for its economic health and was therefore severely impacted by the events in the United States and Europe. There is also little doubt that better government policy prior to and during the Depression could have gone a long way to alleviating the situation. At the same time research indicates that it would be incorrect to place the central blame for the Depression at the door of the Canadian government and policy makers; although much more could have been done to alleviate the hardship of Canadian citizens at the time, particularly with regard to unemployment.

One of the positive results of the great depression for Canada in both a political and economic sense was that change of perception as to the role of the state in the economy.

The Depression altered established perceptions of the economy and the role of the state. The faith shared by both the Bennett and King governments and most economists that a balanced budget, a sound dollar and changes in the tariff would allow the private marketplace to bring about recovery was misplaced.

The Depression also led to a variety of political reforms and movement which were instrumental in advocating the function of the state in economic recovery,