Chapter 8. The Economy since 1920
Economic downturns are thought by many to be part of a cyclical readjustment. They have occurred throughout history as debt mounts and trade falls. The South Sea Bubble of 1720 is generally regarded as the first stock market led crisis, which involved widespread losses among a public that was encouraged to purchase shares in this early joint-stock scheme. A similar crisis befell the Mississippi Company in New Orleans, in the same year, in what was then New France. The Panic of 1796-1797 in the United States and Britain led to the creation of the first American bankruptcy laws. It was, however, the depression at the end of the Napoleonic Wars that most affected Canada in the modern era, not least because it provoked the British Corn Laws as a response, leading to three decades of commercial uncertainty and then opportunity in the British North American grain sector.
Depression and Its Causes
From 1815 through the 1830s, the British, British North American, and American economies stuttered along from one boom to the next bust. There were “panics” in 1825, 1837, 1847, 1857, and 1866. This instability in the North Atlantic marketplace helps to explain the rapid development of financial institutions as moderating influences, and the seeming obsession with tariffs (or, alternatively, free trade) as a mechanism for insulating the economy from disaster.
The pre- and early-Victorian panics thus framed a lot of economic thinking, but it was the period from 1876 to 1896 that was to shape 20th century ideas about crisis management. In the course of a single generation, there were four important downturns: the first produced a depression across the North Atlantic in 1873; the second, a run on New York’s Wall Street Stock Exchange, led to a North American economic crash in 1884; third, the collapse of London’s Barings Bank followed in 1890; and fourth, in 1893 farm product prices collapsed and there was a run on banks in North America, Europe, and Australia. This sequence of economic crises is sometimes referred to collectively as the Long Depression, but it was 1893-1896 that became known at the time as the Great Depression. In every instance, downturns were followed quickly by upticks in the commodities markets and in trade. Depressions — even that of 1893-1896 — were relieved after only a few years. While there was inevitably a scramble to address what appeared to be the proximate causes, the consensus that emerged was that government involvement in the economy was unwelcome and unlikely to produce much positive change.
The recurrent financial crises from the 1700s on are evidence of the growing influence of capitalism, and its emergence as the principal economic system in the Western world. The freedom to move money from one bank or investment to another — and to make a profit by doing so — inevitably led to panics. Efforts to determine the safest kind of currency preoccupied policy-makers through the late 19th century, and the alternatives of the gold standard, silver, and paper were the focus of front-page debates for decades. This, too, reflects the extent to which the economy had shifted to the exchange of cash rather than “kind,” which put more people in jeopardy. If the currency collapsed, then so would the wages of every wage-earner.
The economic downturns also point to an increasingly integrated international economy. So long as British North American grain was being produced mainly for British markets, the impact of a collapse in American grain prices might be minimized. Rising industrialization, however, meant that capital was being invested in machinery and factories with an eye to reaping dividends. In addition, all those industrial workers labouring away in the new factories of Ontario and Quebec now needed to be fed, ideally by farmers in Western Canada. In short, the economic structures that produced the Long Depression would only become more acute in the early 20th century.
If you look at the pattern of booms and busts through the 19th century, what you’ll see is regularity. Each decade had a peak and a trough of its own. The overall trend of the economy was, however, in an upward direction. So each depression was followed by a recovery that quickly moved upward fast enough to match previous levels of production and growth in Gross Domestic Product (GDP). After the 1893-1896 Great Depression, the North American economy boomed and, despite a panic in 1907 in the United States, Canada’s economy went from strength to strength. This period has been referred to in Britain as “the Indian summer of Edwardian England” because — at the time and in retrospect after the Great War — it seemed to be an uncharacteristically prolonged stretch of prosperity. Edwardian Canada’s own “Indian summer,” the Laurier boom, arose because of consumer demand across the newly-settled Prairies. This, in turn, expanded the manufacturing output in Central Canada and primary resource extraction industries across the whole of the country. The reckoning came in 1912, but that severe social — almost cataclysmic — downturn was shortened by the arrival of a wartime economy in 1914. What followed the war is critical for understanding the 1930s crisis.
The Roaring Twenties
The Great War was the first of Canada’s “total wars” (see Section 6.4). Materiel, labour, and soldiers were conscripted, as was capital to some extent. Every quarter of the economy experienced some readjustment from 1914-1918, and many marginal regions — including the Maritimes and the Dominion of Newfoundland — did very well as a consequence. When the war ended, the economy had to shift again to a peacetime footing that was demand-led, rather than command-led. Returning soldiers drove up unemployment rates in a cooling peacetime economy. The Influenza Epidemic of 1918-1919 pounded the economy even further (see Section 6.6). In 1920-1921 there was a brief but sharp economic collapse. Having interfered extensively in the wartime economy, the state pulled back at this time, trying to allow the capitalist market economy to take the lead. In other words, the state very consciously retreated from all but a handful of welfare initiatives and from regulating the economy. The substantial improvement of the economy after 1921 vindicated this approach. Depressions were, by all indicators, short sharp shocks that were tougher on some than on others, but a smart administration was one that “didn’t blink,” that allowed the invisible hand of the economy to do its job.
- New France, British North America, and Canada all experienced cyclical economic booms and busts.
- The incidence of economic crises was increasing at the end of the 19th century, and the pre-war era ended with a severe downturn in 1912.
- Readjustment to a peacetime economy was accompanied by an interwar downturn in the early 1920s.
- Orthodox thinking in government and financial circles was that governments should not interfere in the economy, a perspective that was to inform Ottawa’s response to the crisis in 1929.