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Causes of Great Depression: Canada Great Depression Term Paper


Introduction

History of great depression began in 1929 and lasted up to 1939. It was the longest and most severe depression experience in the industrialized western country. It originated from U.S and had grave impacts on the level of output, led to unemployment, and acute inflation spreading across countries on the globe (Christina, 2003).

However, in Canada, its impacts were severe as it indented and affected almost all aspects of life. The depression had both social and cultural costs. This paper therefore, discusses some of the causes of the great depression in Canada and highlights some of the recovery mechanism.

Literatures on this topic will be used in developing the arguments and explaining the cause of depression in Canada.

Literature review

Economic history

The severity and timing of great depression varied across countries. However, the depression was relatively severe and longer in United States and Europe. The cause of the depression stemmed from a variety of factors. For instance, decline in consumer demand, financial panics, and inappropriate government policies led to the fall of economic output in the U.S (Christina, 2003).

The gold standard that linked almost all countries across the globe to a network of fixed exchange rate also contributed in the escalation of the downtown to other countries. However, as mechanism to recover from the downtown intensified, gold standard was abandoned to ensure expansion of monetary policies.

Even though its effects were devastating, it led to introduction of changes in the operations of economies. Some of the fundamental changes included changes in economic institutions, policies in macroeconomic and economic theory.

Causes of great depression

The fundamental causes of great depression in Canada were the decline in the spending (aggregate demand). The level of production and manufacturing of new products reduced with inventories increasing as a result. This reduced spending, which varied in duration later culminating to the whole state.

Furthermore, the gold standard principle facilitated the spread of the effect to other countries leading to the great depression. However, apart from this, other causes contributed to the great depression as discussed below.

Crash in the stock market in the United State and Canada contributed to the great depression. This resulted from the tricks in monetary policy aimed at limiting the stock market speculation. Prior to this, the state had performed well realizing booms as stock markets rose to their peak.

This led to the raising of interest rates by the Federal Reserve with the aim of slowing this rapid rise in the stock price that depressed spending in areas of construction and automobiles leading to reduced production. Therefore, in 1929, the stock price reached unjustifiable levels due to anticipations of future earnings (Christina, 2003).

However, due to minor event, price reduced gradually leading investors to lose confidence. The fall of stock prices ushered panic among investors leading some to liquidate their holding, an action that worsened the situation further. The crash further reduced the aggregate demand as consumer purchases of durable products diminished, which saw business investment fall drastically. This occurrence made people feel poorer.

Monetary contraction and banking panics also contributed to the great depression in Canada. Depositors lost confidence in the solvency of banks hence demanded their refund of their deposit in cash. Therefore, this caused panic in banks as they were forced to liquidate loans for them to raise the required cash to refund their customers.

This hasty liquidation constrained the operation of most banks hastening their collapse. Further, the decline in money supply further depressed spending among the people in a number of ways. People and business expected deflation due to actual price decline and decline in supply of money; hence, they expected that wages and salary would be lower as a result in future.

This caused people to be hesitant to borrow even though the interest rates were low. This fear stemmed from the expectation that the profits and wages will be inadequate to cover the loans repayments. This also contributed to the reduced consumer spending and spending in business investment hence exacerbating the decline and leading to loss of confidence and pessimism.

According to Amaral and MacGee, Canada suffered a major great depression from 1929 to 1939, a depression that was at the same per in terms of time and magnitude to that of U.S (Amaral & MacGee, 2002). Like US, decline in productivity, output and employment rhymed with that of Canada.

However, when it came to their recovery in terms of output, differences emerged with U.S recording an output of 25% below the trend with Canada 30% below the trend. Therefore, the total factor production (TFP) of Canada was below that of U.S throughout the great depression period.

Furthermore, during this period, the consumption rate in Canada fell and remained below that of United States throughout the period (in 1930s). Similarly, the level of investment in 1933 fell to 15% of its trend value and recovered at a slow pace, but remaining at 50% below the trend in 1939.

Depressions in Canada contributed in the great depression by interrupting credit market through debt deflation and financial crisis. According to Amaral and MacGee (2002), debt deflation contributed to the greater depression in Canada since deflation and high private debt levels reduced borrower wealth and constrained the level of lending.

Contrary , Amaral and MacGee (2002) argue that the debt crises was not severe in Canada as compared to U.S and that there is no enough evidence to suggest or prove that debit crisis caused or contributed to the great depression in Canada (cited in Haubrich 1990). Despite this, Canada’s great depression was characterized by insolvencies under provisional company act, bankruptcies, and other proceedings like tariff sales and bulk sales that contributed to the loss of creditors.

These episodes rendered Canada to have a debt; therefore, making its investors and lending parties lose trust and confidence in Canada, hence resulting to their economic downtown. Furthermore, this led to the deterioration of trade leading to the depreciation of the Canada dollar exacerbating further their volatility.

Banking crises also played a significant role in the transformation of the 1929 downtown into great depression. According to Amaral and MacGee, the financial crisis of 1930-33 affected the macro economy by reducing the quantity of financial services, primarily credit intermediation” (cited in Bernanke 1983, p.262).

This therefore depicts that monetary shocks in Canada mattered and contributed to the great depression. The surprise deflation and the sticky wage story in the labor markets are also considered to have caused the great depression.

Amaral and MacGee argue that the great depression was severe because it was unexpected (cited in Lucas and Rapping (1969), while (Cole and Ohanian 2000a) “for this claims to apply observant of low nominal interest rates in the 1920s and high nominal and ex post real interest rates in the 1932 need to be considered” (Amaral & MacGee, 2002).

The real wages varied across different sector in Canada and therefore, most researchers argue that the imperfectly flexible nominal wage is quantitatively unable to explain or even associated with the causing the great depression.

Furthermore, other causes of the Canada great depression is traced back in the early 1922s. The economy was performing well and there was overproduction and expansion taking place. Industry expanded as large amounts of profits accrued from the business and investments in existing factories and construction of new ones was at a high rate.

This led to huge supplies leading to stockpiles. This caused panics and slowed down the process of production with many companies laying-off its workers as a result (Jay, 1998). Less money was spend in purchasing, which slowed down further the profits and level of investments

Canada’s dependence on few primary products also contributed to the great depression. The economy of Canada depended on few basic products like wheat, minerals, fish, pulp and paper. The economy had thrived on its own earlier due to the high demand of these products but however, when countries around Canada were hit by depression, the products prices fell in their demand with fish and wheat in West being the hard hit.

Furthermore, Argentina was producing more wheat and this lead to further drop in wheat prices. This affected the economic position of Canada drastically.

In addition, the drought witnessed on the prairies destroyed crops making it hard for the farmers who had borrowed mortgagee to pay. This also saw various industries dealing in production of wheat, flourmills railways affected and slowed down further impacting to the economy.

Canada’s dependence on U.S was one of the factors that contributed in its great depression. Canada and U.S economy are closely linked and therefore, when US was affected by the depression the ailments extended to the Canada due to the relationship.

For instance, the U.S declined trading with Canada in the sector of fish, wheat, lumber, minerals and paper leading Canada to be part of the countries facing great depression. Furthermore, high tariffs contributed in the great depression of Canada. In the wake of the First World War, as countries recovered, many countries in need of Canada’s food products could not trade with it or afford their products due to high prices as a result of high tariffs levied on them.

This deterred trade with its countries. Consequently, many countries also levied high tariffs on imports as a mechanism to protect their home countries from collapsing (Ali & James, 1999). Therefore, these constraints affected the free trade and contributed to the great depression. Moreover, too much credit buying contributed to the great depression.

In early 1920s, credit buying became popular and this saw many people getting themselves into debts. This had effects in the long run as many people were unable to repay the loan and after their deaths or retrenchments. These debts contributed to a deficit and bankruptcy of several financial institutions hence contributing to the great depression.

Credit buying of stocks also contributed to the great depression. In 1920, people bought stock on margin. They only required 10% of their money and the broker loaned the rest on higher interest rate. This notion behind this was that as soon the stocks increased in value, they could be sold, the broker could be paid, and profits accrued benefits the investor.

This however, did not go as anticipated, and in 1929, panic cropped up leading to reduced prices. This affected the operation of these stock markets leading to great depression. Therefore, the great depression in Canada can be attributed to the four major interpretations.

First the classical economics or Australian school theory, whose arguments were and still hold to be as yet another phase in the business cycle, but whose effects were greatly exacerbated by interventions policies of the Hoover administration and the Roosevelt administration.

Hence, the New Deal made the great depression even greater than it was. Secondly, is the Keynesian theory (Marxist theory) that associated the cause of depression because of increased overproduction and under-consumption. These conditions could be solved by intervention of state in form of fiscal policy and deficit spending.

Thirdly, the Freidmanian theory that focused on the great contraction through sharp money shrink, the incompetent and non-interventionist behavior of the Federal Reserve systems contributed to the great depression.

Last is the Schumpeterian theory that focused on the maturity and temporary stagnation of the once new industries that had earlier contributed to the growth of economies in the early 1890 to 1920s. Industries under these categories included the automobile, electrical and chemical industries and radio industries (James, 2010).

Recovery

Canada like U.S fought to liberate itself from the great depression that had impacted negatively on its economy and the lives of its people. According to Amaral and MacGee (2002), employment recovered quickly compared to productivity, which remained below the trend.

The case was opposite to the U.S, which recorded a quick recovery in productivity and its labor force remained depressed. The decline in recovery in Canada was attributed to the reduction in the international trade in the early 1930s. The trade was affected by the high debts between Canada and other countries leading to lack of trust among its creditors.

Crown Council also assisted in reducing the effects of the depression through creation of Bank of Canada and Canadian radio broadcasting commissions (Fabio & Claudio, 2011). The radio, which was established in 1932, helped in unifying the country and uplifting the people through the harsh economic times as it restored many people lost hope and regained their hope that the future was bright.

The bank was used in regulating the currency and credit. It also served as private banker’s bank and assisted by providing advice to the government on the best policies concerning financial issues and debt issues. This enabled the government to adopt right policies in ensuring that the situation was managed and contained amicably.

Conclusion

To conclude, the causes of great depression in Canada vary and can be traced back to the early 1920s state of economy. Even though various researchers refute some reasons by other researchers, it is apparent that most of the reasons discussed in one way or another contributed to the great depression.

Among the factors contributing to the Canada Great Depression included drastic fall in stock prices, trade, bank debits among many other reasons as discussed.

References

Amaral, P.S, & MacGee, J.C. (2002). The Great Depression in Canada and the United States: A Neoclassical Perspective. Review of Economic Dynamics, 5(1): 45-72.

Ali, A., & James K. (1999). Nonmonetary effects of the financial crisis in the Great Depression, Journal of Economics and Business, 51(3):215-235.

Christina, R.D. (2003). Forthcoming in the Encyclopedia Britannica. Great Depression. Retrieved from

Fabio, C. B., & Claudio, M. (2011). The Great Recession: US dynamics and spillovers to the world economy. Journal of Banking & Finance, In Press, Corrected Proof, (55)5: 1-13

James, K. (2011). A Tale of Four Crises: The Politics of Great Depressions and Recessions. Orbis, 55(3): 500-523

Jay, Z. (1998). Was depression era unemployment really less in Canada than the U.S.? Economics Letters, 61(1): 125-137.

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