Rethinking the Great Depression

In the 1930s, Canadians suffered through the worst economic depression in their history. Up to a quarter of the workforce was unemployed. Hundreds of thousands of people lost their homes, their businesses, their hopes and their dreams. Marriages and families were postponed, and the phenomenal social costs affected children and grandchildren. A large proportion of the population had to go on welfare (relief), forced to beg for charity by proving they were destitute. People ate gopher stew and made clothing out of flour sacks, and a lost generation of men rode the rails from city to city in a desperate search for jobs that simply did not exist.

Many provincial and municipal governments were soon overwhelmed by the cost of welfare, and several provinces faced bankruptcy. The federal government came to their aid, assuming a large share of the cost of welfare and loaning them hundreds of millions of dollars. This federal assistance was never adequate, however, and two of the most important questions in Canadian history are why Ottawa did not do more to deal with the suffering and why it did almost nothing to address the causes of the crisis. Interestingly, the answers academics have provided reflect not only the events of the Depression but the entire spectrum of Canadian history, from Confederation to the present day.

Numerous explanations have been given for the suffering created by the Depression. Although 25 percent of workers were unemployed, 75 percent had jobs, and they resisted paying higher taxes for those in need. Many people believed that there were plenty of jobs available and that the unemployed were just too picky or lazy to take them. The Depression reduced the revenue of all governments while creating enormous demand for welfare. Exports fell drastically, producing unemployment in many sectors of the economy. Ideology was an important factor, as politicians, elites and much of the public rejected new ideas, including ones that were proving successful in the United States and several European countries.

Ever since the Depression a favourite explanation among Canadian academics is that the constitution, the British North America Act of 1867, was a large part of the problem, if not the main problem. ((The following 25 academics identify, to a greater or lesser degree, constitutional constraints on the federal government’s ability to deal more effectively with the Depression: Christopher Armstrong, The Politics of Federalism: Ontario’s Relations with the Federal Government, 1867–1942 (University of Toronto Press, 1981), beginning at page 146; Donald Creighton, Canada’s First Century, 1867–1967 (Macmillan, 1970), beginning at page 208; Donald Creighton, Dominion of the North: A History of Canada (Macmillan, 1962), beginning at page 486; Robert MacGregor Dawson, The Government of Canada, third revised edition (University of Toronto, 1957), page 122; John Finlay and Douglas Sprague, The Structure of Canadian History (Prentice-Hall, 1979), page 273; Roger Gibbins, Conflict and Unity: An Introduction to Canadian Political Life, third edition (Nelson, 1995), beginning at 310; J.L. Granatstein, Irving M. Abella, T.W. Acheson, David J. Bercuson, R. Craig Brown and H. Blair Neatby, Nation: Canada Since Confederation, third edition (McGraw-Hill Ryerson, 1990), beginning at page 330; J.L. Granatstein, The Ottawa Men: The Civil Service Mandarins, 1935–1957 (Oxford University Press, 1982) page 273; Gérard V. La Forest, The Allocation of Taxing Power under the Canadian Constitution, second edition (Canadian Tax Foundation, 1981), beginning at page 25; Edgar McInnis, Canada: A Political and Social History (Holt, Rinehart and Winston, 1959), beginning at page 430; Desmond Morton, A Short History of Canada, fifth edition (McClelland and Stewart, 2001), beginning at page 225; William Morton, The Kingdom of Canada: A General History from Early Times (McClelland and Stewart, 1963), beginning at page 457; Kenneth Norrie, Douglas Owram and J.C. Herbert Emery, A History of the Canadian Economy, fourth edition (Thomson-Nelson, 2008), page 127; Roger Riendeau, A Brief History of Canada (Fitzhenry and Whiteside, 2000), beginning at page 225; Richard Simeon and Ian Robinson, State, Society and the Development of Canadian Federalism (University of Toronto Press, 1990), beginning at page 75; and Donald Smiley, Canada in Question: Federalism in the Eighties, third edition (McGraw-Hill Ryerson, 1980), beginning at page 32.)) The theory is that at the time of Confederation, the federal government was given authority to collect taxes by any means because it had the expensive responsibilities, particularly acquiring the Northwest and building railways to the Atlantic and the Pacific. In contrast, the provinces were limited to the least lucrative taxes to finance less important duties such as local roads. The Fathers of Confederation could not have foreseen that 65 years later welfare—a provincial responsibility—would be the biggest financial challenge. Thus, according to the theory, the constitution created a mismatch between federal financial strength and excessive provincial needs.

This theory suffers from half a dozen serious flaws. An examination of the constitution and of what federal governments did or did not do before, during and after the Depression makes it very clear that the constitution was an excuse for federal inaction, not the cause of it.

One major problem with the constitutional argument is the fact that under the BNA Act, responsibility for agriculture is shared between Ottawa and the provinces. Many of the destitute were farmers, and Ottawa spent millions of dollars on programs to help them. It was never enough, and the provinces had to step in with programs of their own. Ottawa could have paid for all these programs, leaving the provinces with more revenue to address their exclusive responsibilities. Similarly, the constitution did not prevent Ottawa from collecting more taxes to spend on programs for which it clearly had authority, such as building a Trans-Canada Highway.

Second, Ottawa demonstrably did what it wished in the field of relief. Welfare was a provincial responsibility, and when provinces begged Ottawa for help, hundreds of millions of dollars were provided. Ottawa maintained that such payments were temporary, which proved to be untrue, and that welfare remained an exclusive provincial responsibility, which was hardly the case since the funds clearly indicated an acceptance of responsibility. With the constitutional problem seemingly finessed, Ottawa proceeded to pay one third the cost of welfare. But if it could pay one third, then obviously it could have paid two thirds or even more. Its unwillingness to do more reflected political, financial, attitudinal and ideological factors, not constitutional limitations.

A third flaw is the fact that under the constitution, Ottawa alone had the legal power to borrow theoretically unlimited amounts of money. In 1933, British Columbia premier Dufferin Pattullo introduced a huge program of infrastructure projects to create jobs; Ottawa would not borrow funds to match that provincial spending and the program faltered. Quebec’s much maligned premier Maurice Duplessis doubled the provincial debt in just three years in order to create jobs; Ottawa did not match that borrowing and spending. Both premiers were following Keynesian economics, but it was not until 1938 that Ottawa deliberately borrowed money to stimulate the economy. In both world wars Ottawa borrowed massively—fighting wars was seen as a challenge that had to be met; fighting the Depression was a problem to be avoided. That was a political choice.

Fourth, it certainly was not the constitution that rendered the provinces too poor to address the Depression, even though it is often argued that the BNA Act was the cause of that problem. That act gave both levels of government the right to collect direct taxes such as those on personal and corporate income, but Ottawa did not collect such taxes until the First World War. When military costs plummeted after the war, the provinces expected that Ottawa would cease collecting those taxes, leaving them with the revenue needed to finance their rapidly growing responsibilities in welfare, health, roads and education. Instead, Ottawa continued to collect direct taxes, sharply limiting the capacity of provinces to tap the same sources of revenue.

The Fathers of Confederation knew that the provinces could not pay their bills from the sources of revenue allocated to them. Before Confederation, 85 percent of colonial revenue came from customs and excise taxes. In a federation such taxes had to be collected by the central government, with part of the revenue returned to the provinces for their needs. In 1867, those transfers provided around 60 percent of provincial revenue and accounted for almost 20 percent of Ottawa’s spending. Unfortunately the formula did not take into account rising costs, new responsibilities or greater needs, and the proportion of provincial revenue provided by the transfers diminished. By 1896, the subsidy had fallen from 60 percent to around 40 percent of provincial revenue, then to around 10 percent by 1929. Ottawa’s invasion of the direct taxation field and its failure to maintain subsidies at 1867 levels meant that the provinces could not properly fulfil their roles even before the Depression began.

The fifth flaw is that there were ways for Ottawa to wiggle out of the alleged constitutional “straitjacket.” In 1927, Ottawa launched an old age pension scheme although welfare was a provincial responsibility, proving that the constitution did not prevent it from invading provincial jurisdiction. In the United States, President Franklin D. Roosevelt stacked the Supreme Court with justices who would approve his depression-fighting New Deal legislation. No such methods were used by Canadian governments to expand their power, and the courts were actually used to prevent federal action. After the Second World War, Ottawa found ways to become involved in all the main areas of “exclusive” provincial responsibility. In the 1930s, those ways were known and had been used; Ottawa chose not to pursue them.

The worst flaw in the constitutional straitjacket argument relates to the fact that Ottawa did have the authority to deal with the underlying cause of the Depression. That cause was a contraction of credit, of the amount of money in circulation, and the federal government was clearly and solely responsible for banking, currency and credit. The solution was for Ottawa to print money until the amount in circulation rose to a level adequate to finance the potential level of economic activity. Printing money was a well-known technique to pay government bills or stimulate an economy, and that is how some European governments ended the Depression well before 1939.

The desperate Social Credit government of Alberta tried to create credit in 1937, but Ottawa and the courts vetoed that legislation. The Bank of Canada did create some additional credit after 1935, but the federal government was strongly opposed to such a policy—it remained worried about inflation when the main problem was deflation, and it made no serious attempt to counter deflation. After 1939, Ottawa financed part of its wartime contracts with credit created by the Bank of Canada, and the Depression mercifully came to an end.

Clearly the BNA Act was not a major factor preventing Ottawa from dealing with either the effects or the causes of the Depression. The question, then, is why so many academics have said for decades that it was. The answer to that lies in ideology, in attitudes so pervasive we may not even see them. In 1914, English-speaking Canadians still identified themselves with Britain, and Canada went to war to save king and empire. By the end of the war, many of those people had come to see themselves as Canadians first, and that sense of Canadian nationalism continued to grow. Nationalism was fostered by Canada’s outstanding contribution to the Second World War and to the establishment of the United Nations, the Commonwealth, the North Atlantic Treaty Organization and the General Agreement on Tariffs and Trade. It was reflected in the appointment of a Canadian as governor general, changing Dominion Day to Canada Day, turning the Royal Post into Canada Post, abandoning British military traditions, adopting a distinctive flag, restricting American cultural and economic influences, and in patriating the constitution in 1982.

In the 1960s, English-Canadian nationalism reached full maturity, and what nationalists in any country want is a strong national government to defend them from foreign domination and influence and to develop national institutions, a national identity, a national culture and national standards for programs such as welfare and health. Provincial rights, no matter how legal and logical, often stand in the way of such national uniformity. English-speaking academics did not live in a vacuum—they were as much affected by increasing nationalism as anyone and their nationalism was and is reflected in the history and analysis they produced.

These academics wanted a strong central government, and that led them to take sides. They defended federal actions and inaction, excused mistakes, and asserted that merely appointing a royal commission to study welfare and taxation was a great achievement. They ignored or downplayed the fact that the United States and a number of other countries did find ways to ease the Depression. Provincial premiers were described as narrow-minded, parochial obstructionists, even when they were upholding the constitution. Court decisions that overturned provincial legislation were defended, while scorn was heaped on courts that declared federal legislation unconstitutional or dared to say that provinces are sovereign in their exclusive areas of responsibility, which is, in fact, the essential characteristic of federalism.

These academics developed the argument that the constitution prevented federal action because they wanted a fundamental shift in the balance of power from the provinces to Ottawa. The solution they saw to the imbalance between federal financial resources and provincial responsibilities was to transfer some of those responsibilities to the federal government, especially welfare and unemployment insurance, rather than transferring more taxation room to the provinces.

The campaign of the English-Canadian nationalists was largely successful, and they played an important role in encouraging nationalism and in the resulting development of a much stronger federal government. Interestingly, though, most of the policies and programs that have prevented a recurrence of the Great Depression were implemented without amendment to the constitution, reinforcing the conclusion that the BNA Act was not the problem. Indeed, the recent recession revealed a high degree of cooperation by all three levels of government with no discussion of constitutional obstacles to such cooperation.

The Depression was, indeed, one of the greatest tragedies in Canadian history. For ten long years governments at all levels grappled with a crisis of unprecedented proportions. The federal government came to the aid of debt-stricken provinces and people, spending perhaps one fifth of its budget on various kinds of relief, and financing over one third of provincial spending on welfare. But while its spending during the Depression averaged around $500 million a year, its wartime spending just a few years later jumped to over six times as much.

The reason Ottawa did so little in the Depression reflected the attitudes of politicians and voters, not the constitution and its interpretation by the courts. The alleged constitutional straitjacket is in considerable measure the creation of English-Canadian nationalists who wanted Canada to have a stronger central government and wanted welfare to be made a federal responsibility, along with health and higher education. That is what led them to rewrite the history of what actually did and did not happen during the Depression, and of why the federal government did so little to address the causes or effects of that tragedy.