Module 6
The Turbulent Years, 1913-45
6.1 Overview
Theme of Era
 The dominant feature is the continuous adjustment in the economy to
a series of major and prolonged shocks
 An era of challenge and response to major international events and
changes
General Patterns in Evolution of Economy
Fig P5-1 - extensive growth
Fig P5-2 - intensive growth
Fig 14-1 - composition of AE
Fig 14-2 - sectoral composition of output
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6.2 World War I
Overview of Pre- War Economy
 Investment boom collapses in 1913 with sharp decline in construction
and railroad activity.
Initial Impact of War in 1914
 Made recession worse
Structural Shifts in Aggregate Expenditures, 1914-18
Fig 14-1
Investment (I) – falls from 30-35 % of GDP to 13% as capital imports
shrink
Exports (X) – rise from 20% to a peak of 40% in 1917
Government (G) – rise from 10% to 15% of GDP
Labour Market
 Army took many young males out of labour market
 Immigration also fell dramatically
1913
402,000
1915
145,000
1916
48,000
 War fuelled production increased demand for industrial workers and
agricultural labour
Balance of Payments
 Rise in exports coincided with decline in imports from Europe (Table
16-2)
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 Improved current account balance (X-M) in Canada’s favour (Table
16-1)
Pre - War Role of Government in Economy
 Small federal budgets biased to assist railroads and generated an
operating surplus
 Fig 14-3 shows most revenues derived from indirect taxation
Financing War Effort
1) Borrowing
 Shifted international sale of bonds from London to New York.
 Domestic loans sought for first time in bond markets and individual
investors
2) Direct Taxation
 Excess business profit tax put on corporate income
 “Temporary” personal income tax in 1917 (Table 14-1)
3) Monetary Policy
 Canada went off the international gold standard
 Federal government obtained “free” loans that expanded money
supply and fuelled inflation (Fig 16-1)
(GRAPH)
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New Responsibilities of Government in 1918
1) War-time pensions
2) Debt servicing
3) Consolidate new railroad network under CNR
Manufacturing in the War Economy, 1914-18
 Canada slow to learn skills and adopt techniques required for
sophisticated war products
 Imperial Munitions Board (IMB) established in 1915 to meet critical
shortage of British
 IMB provided about 30% of British artillery in 1917 (picture)
Pre-War Farm Conditions
 Slowdown in sectors growth due to
1) settlement of marginal lands in Central and Western Canada
2) rise in farm debt
3) average yields fall
Recovery of Agriculture
 war demands for foodstuff and good weather lead to sharp rise in
price of wheat and farm lands
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 Board of Grain Supervisors set up in 1967 to fix grain prices and
handle all bulk overseas sales
 Increased investment in vehicles, machinery and equipment (photo)
Long-Run Consequences of War on Economy
1)
Trend in Industrial Development
 Output trends Fig 14-4
 Occupational shifts Table 14-2
 Role of women expanded and right to vote in 1918
 Radicalization of labour movement
2)
Impact on Regional Development
 IMB contracts granted to large manufacturers in Central Canada
 Maritime shore of mfg employment falls from 11% in 1910 to 6% in
1921
3)
Adverse Impact on Western Agriculture
 Over specialization on wheat
 Rise in debt in search of short term, speculative profits in rising land
prices
 Settlement of marginal lands
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6.3 Regional Disparities
Population Trends
Table 16-1
Regional Income
1870
Table 16-4
1891-1929 Table 16-2 , 16-3
Reasons for Regional Disparities
1) Employment Rate
 Age structure
 Labour force participation rates
2) Industrial Structure
 Sectoral mix of industries with different levels of productivity
3) Intra Industry Productivity Differentials
 Due to factors such as:
o Scale efforts
o Capital per employee
o Education and skill of workforce
o Access to technology
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Schools of Thought Regarding the Economic Decline of the Maritimes
1) Traditional
 Tariffs diverted the regions attention from traditional trading patters
toward Central Canada
 The completion of the transcontinental rail system brought
manufactures from Central Canada rather than providing export
market
 “trade deficit” financed by outflow of savings
2) S.A. Saunders
 Maritimes were a classic example of a staple trap where international
forces shifter away from narrow resource endowment of region.
3) Structuralist School
I) Loss of control over public affairs
o Confederation transferred important powers for economic
development to the federal government
II) Loss of control over private affairs
o Initially developed by T.W. Acheson
o Maritime entrepreneurs initially responded to national policy
tariffs but the transition to a mature industrial stage was
thwarted by:
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a)
previous patterns of development
b)
outside interests brought key firms that eventually failed
Critique of Structuralist View
 regional disparities extend back to 1870
 reverts to older interpretation that focuses on:
I)
II)
poor resource endowments

thin soil

climate

limited urban development
technological changes
 new technologies in ocean shipping undercut wooden
shipbuilding and shipping activities
Prairie Protest
 tariffs and railway freight rates rescued farm incomes and
worked against the regional industrial development
 Dominion land policies distorted patterns of settlement and
deprived provincial governments of an adequate source of
revenue
Economic Decline of Newfoundland (1885-1905)
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1) Economic crisis in cod fishing where employment fell from 60,000
in 1884 to 37,000 in 1891.
2)
Reaction to crisis
- Homestead low
- Subsidies
- Public works
3)
Economic strategy for diversification
General Pattern of Industrial Development
Table 14-4
Table 14-5
Evolution of Organizational Structure of Firms
- small scale firms with owner/proprietors give way to modern
corporation with professional management
Reasons for Industrial Organizational Transformation
1) Technological innovations in manufacturing techniques of production
changes optimal scale
2) Innovation in sphere of product circulation
-transportation & communication
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-wholesaling & retailing
3) Rise of Scientific management and new class of professional managers
4) Financial innovations
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6.5 STRUCTURAL CHANGE IN THE ROARING TWENTIES
Post War Adjustment
I)
II)
III)
IV)
Output
1918
6% ↓
1919
7% ↓
1920
0%
1921
9.6% ↓
Price Index
1918
13.1% ↑
1919
10.1% ↑
1920
16% ↑
1921
11% ↓
1922
9.3% ↓
Exports
1917
37% of GDP
1921
28% of GDP
Manufacturing
Figure 14-4
Economic Trends in 1920's
I) Output
Figure P5-1
P5-2
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II) GDP by Sector
Figure 14-2
III) Final Demand Expenditures
Figure 14-1
IV) Investment
Figure 15-3
Banking and Monetary Policy
Finance Act
-passed in 1914 and amended in 1923
-Canada off gold standard from 1914 to 1926
-returned in 1926 but suspended in 1928
-permanently abandoned in 1931
Active Banks
1900
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1929
11
- 70% of bank assets controlled by Big 3 banks in 1928
Wheat Economy
- wheat prices and land prices fell dramatically in post-war period
- prices recovered somewhat and yields improved by mid-1920's
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- new CNR created in 1922
Emergence of U.S. Influence
1) Pattern of trade
Fig 15-1
15-2
Table 15-2
2) Foreign Investment
Table 15-1
Controversy Surrounding Direct Foreign Investment
1) Pros
I) New sources investment, technology and entrepreneurship
II) Access to new markets
III) More competitive domestic market
2) Cons
I) Balance of payments
II) Few spread effects
III) Productivity stifled by miniature replica effect
IV) Compromise national goals or even undermine political sovereignty
Reasons for Foreign Investment
1) Macroeconomic conditions
Table 16-1
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2) Level of Canadian tariff
3) Imperial preferences
4) Superior industrial technology in U.S.
5) Canadian patent law
6) Resource policy in Canada
7) Resource depletion in U.S.
8) Government subsidies
Structural Changes in Domestic Demand
1) Electricity
-new source of power for households and businesses
-required large investment expenditures
2) Automobiles
-transformed society and became an engine of new economic growth
Automobile Industry
1) Major Firms
-McLaughlin Motors/G.M.
-Ford
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-Studebaker
-Russell Motors
-Durant Motors
2) Growth of industry
Table 15-3
3) Impact
-spatial layout of cities
-retailing
-interurban transit
-rural/farming transport
-linkages
-backward
-forward
-final demand
-fiscal
-lateral
4) Organizational Structure
I) Early period
- owner/managed
II) Consolidated period
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- professional management
Growth of Urbanization
- rapid growth of the “Golden Horseshoe” area (Oshawa-TorontoHamilton-Niagara Falls)
Table 15-1
Changes in the Public Sector
- relative decline in the importance of the federal gov't
- Provinces grow in response to demands for services in education,
health and social programs
Employment Trends
- shift to urban work continues
- white collar revolution emerges
- women enter new professions
- signs of growing disparities as there is an uneven distribution of
benefits from a rising standard of living
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6.5 THE GREAT DEPRESSION
Output Trends
Figure P5-1
P5-2
14-1
14-2
International Economic Trends
1) Commodity glut
2) Unstable international currencies
3) Collapse of international financial markets
4) Rise of protectionism
5) Different impact on various countries
Table 17-2
Vulnerability to International Disturbances
1) Export orientation
2) Commodity composition of exports
Table 17-1
17-3
3) Geographical orientation of exports
Table 17-4
4) Vulnerability of Canada to International Disturbances
1) Export orientation
II) Commodity composition of exports
Table 17-1
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17-3
III) Geographical orientation of exports
Table 17-4
5) Lag in Economic Recovery Behind Rise in Exports
I) Excess capacity
II) Growth of debt
Business Response
Figure 14-1 and below show sharp downturn in private sector investment
Government Response
I) Federal
Figure 17-1
II) Provincial & Municipal
Table 17-5
Short Run Consequences of the Great Depression
1) Standard macroeconomic interpretation
2) Social upheaval
Long-Run Consequences of the Great Depression
1) Public Policy
- 1930's saw the collapse of the international monetary, financial and
trading system
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- the failure to restore economy to full employment levels for a whole
decade resulted in a massive paradigm shift in the economics profession
toward Keynesian concepts of managing the economy with
interventionist stabilization policies
I) Monetary Policy
- create the Bank of Canada
II) Fiscal Policy
- broaden the tax base to enlarge direct taxes (ie personal and corporate
income taxes)
- adopt the philosophy of the welfare state
III) Exchange Rate Policy
- reject the old gold standard
- adopt a managed or “dirty” float of the dollar until the Bretton
Woods system
2) Long Run Aggregate Supply (LRAS)
-did not shift to the right as much as the 1920's
(graph)
Factors Affecting LRAS
I) Labour Force
- no immigration
- lower participation rates due to discouraged workers, withdrawal of
females
- rise of trade union movement and minimum wage legislation
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II) Capital Stock
-little investment in producer durables
III) Natural Resources
-little exploration and development
IV)Technology
-slowdown in R&D
-little opportunity for innovation due to investment slowdown
V) Degree of Openness
-trade barriers rise
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6.6 World War II
Overview
Figure P5-1
P5-2
Figure 14-1
14-2
Chapter #18: World War II
Early Years (1939-40)
- doctrine of limited war stressed concern with over commitment
- shift to mobilizing for total war occurred in response to NAZI victories and
led to dramatic increases in output of military products through market
incentives or government direction and regulation
- the War Measures Act allowed for central direction of the economy as the
normal legislative process could be set aside and orders-in-council used
Federal Gov't Revenue and Expenditures, 1938-45
Fig 18-2 shows the dramatic rise in expenditures from 1941 to 1943 which
were financed by deficits
- federal gov't expenditures as a % of GDP
1917 16%
1939 11%
1943 45%
1945 42.5%
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Financing Government Wartime Expenditures
1) Taxation
- Fig 18-1 shows that taxes in 1937 such as customs duties, excise taxes
and sales taxes depended on consumption spending that had to be
reduced
- personal income taxes were increased and extended to the middle class
- corporate income tax and excess profit taxes also raised
- Fig 18-3 shows revenue base in 1947
2) Borrowing
-over 75% of debt financing raised through financial markets
3) Money Creation
-less than 25% of debt financing purchased by the Bank of Canada
Reallocation of Civilian Production to Wartime Need
1) Macro Level
I) Wage and price controls
II) Balance Payments
- dramatic shift in balance of payments with Great Britain lead to
large loans and the imbalance with the United States lead to
exchange controls to discourage expenditures on U.S. dollars
II) Micro Level
- shift economic resources to produce finished military products and
intermediate inputs such as components, energy and efficient
transportation
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- Dept. of Munitions and Supply led by C.D. Howe established crown
corp. and built 98 war plants to produce aircraft; merchant marine and
naval escort vessels; various steel products like munitions etc.
Economic Impact of the War
1) Industrial Sector
- 30% increase in investment in mfg from 1931 to 1941
- 100% increase in workforce from 1939 to 1943
2) Labour Force
- relative decline in primary activities and increase in industrial sector
and public sector
- growth of labour unions
- female participation rate reaches a peak of 33% - a level not reached
again until 1967
Table 18-1
3) Regional Benefits
Fig 18-4
Planning for Reconstruction, 1943-45
- necessity to maintain a large, activist public sector
I) planning required to demobilize the military and shift war industries to
civilian activities
II) Reshape the social and economic structures to usher in a new era of
government activity in social security, social justice etc.
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III) Macro Stabilization policies necessary to maintain aggregate demand by
lowering taxes, cashing in war bonds and introducing family allowance
IV) Support new international economic order to enhance trade and
encourage foreign investment (IMF, GATT, World Bank)
- effects were largely successful. Fig 18-5 shows the GDP peaking in
1944, falling about 5% over the next two years and then slowly rising to
peak levels by 1949.
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