The Great Depression In The Canadian Economy -

Introduction

The Great Depression is an economic crisis that started in 1929 and soon engulfed virtually every manufacturing nation and all the food as well as raw materials producers. Back in the years 1931, Keynes, who was an English Economist, discovered that the entire world was then in the most exceptional economic catastrophe. In the modern world, there is an excellent possibility that once this crisis is looked back up, primarily by most of the economist of the future, it will mark one of the top turning points. According to Keynes, this was what caused the 2008 Financial Crisis and the table 1.0 below shows some of the dimensions that were applied to evaluate the Great Depression.¹

Table 1.0: The Great Depression Vs. Great Recession in the advanced countries²

Year	Real GDP	Price Level	Unemployment (%)	Trade Volume
1929	100.0	100.0	7.2	100.0
1930	95.2	90.8	14.1	94.8
1931	89.2	79.9	22.8	89.5
1932	83.3	73.1	31.4	76.5
2007	100.0	100.0	5.4	100.0
2008	100.5	102.0	5.8	100.6
2009	97.3	102.9	8.0	85.0
2010	99.6	103.7	8.4	93.3

Therefore, sustained recession did not start in the United States until the year 1933, but the United Kingdom trough happened back in the late 1931 and during the year that followed, it also occurred in Germany. Both the United States of America and Europe, even in the recovery process, they encountered a persistent of mass unemployment, which was denoted as the curse of depression decade. Back in the year 1937, all over to 1938, a further sharp Depression happened in the economy of United States, which raised the rate of unemployment and of course, imposed more deflation compared to the previous period. By the late 20th century, the overall memory of the international financial seizure in the two States, and there was a recede of severe deflation, and mass unemployment.³

However, during the year 2007 to 2008, an unexpected and astonishing collapse happened which made all the core economic variables to fall at very high rates compared to the fall what was encountered during the early 1930s. In fact, ccording to Eichengreen and O’Rourke (2010),⁴ the World Trade Volume, the entire achievement of equity trades as well as the industrial production fall steeply in the year 2008, especially during the 2008 Financial Crisis. Furthermore, a full-blown financial crisis emerged very quickly. In fact, the United States real estate and the sub-prime mortgages dropped, which were the most attractive investments for both the residents and international, became a millstone on financial institutions that had earlier snapped them up. Back in April 2007, the New Century Financial, one of the largest United States sub-prime lenders, filed for the Chapter 11 Bankruptcy. Therefore, in this essay, I will discuss what the Great Depression taught us about the Canadian Economy and also how did it help us deal with the 2008 Financial Crisis. The essay will also point out how future crises can be avoided by the lessons that were learned from the Great Depression.

Lessons Learned From The Great Depression In The Canadian Economy

Beginning with the fiscal and monetary policy, the headlines from the experience of Americans are clear enough. The overall financial strategy bears a significant responsibility for the early slumps; subsequent research and studies have refined, instead of refuting the claims of the Friedman and Schwartz (1963). The monetary and fiscal policy errors were of both the omission and commission and the inappropriate tightening of this policy precipitated the downfall, while the subsequent failure to offer excellent monetary stimulus enabled recession to develop into this depression. In specific, according to the Bordo and Lane (2010)[5], it was discovered that the Federal Reserve failed in its critical role as a financial lender of the final resort and hence, made this economic crisis more severe. The mistakes were not repeated back in 2008 to 2009, primarily when the monetary policy was aggressively expansionary (Wheelock, 2010)[6].

Therefore, regardless of whether it has been anticipated or not, the extent of deflation clearly devastates an economy. The extreme version of the deflation has several critical implications for the current economy as well as policymakers. First, and most important, it suggests that the idea of setting a target of zero inflation for the Central Bank policy may be more severe, and one has to assume that, with a competent policymaker in regulations. There will exist equal chances such that resulting in the inflation will be below or above the level of the target. However, if deflation is an adverse outcome, there are supposed to be an extreme aversion to it, and of course, the initial target level must be above zero. It seems that a modest amount of permanent inflation is a significantly small price to pay for reducing the entire chances of repeating catastrophic events for the early 1930s. Also, the second lesson for the Central Bankers concerns to the overall functioning and activities of the lenders of the ultimate or last resort, especially for those which were meant for short-term stabilization of the financial system was the active operations. In fact, efficient processes of those financial institutions of lenders of the last resort are the perfect method for carrying out this. There is no concrete reason that people should ever experience a systematic downfall of the banking system such as what was denoted in the early 1930s Great Depression.[7]

On the other hand, in the recovery of the 1930s, by contrast, monetary growth also offered an impetus, while there was virtually no fiscal or monetary stimulus. However, it’s sensible to suppose that the economic multiplier was quite significant. It’s, therefore, crucial not to be misled by the frenetic activity of the New Deal, that is, the fiscal policy did not fail, and instead, it was not tried. Also, it must be understood and recognized that a robust recovery was rudely disrupted by the severe recession of 1937-1938, which seems to be discussed and explained further by the deflationary moves that were present in both the fiscal and monetary policy. In Canada, most Canadian had traditionally moved to the south, especially during the tough times. However, this tactics or strategies never worked, mainly when the times were just the same as the tough times experienced in the United States. In fact, back in the year 1924, more than 200,000 Canadians immigrated to the United States while during the year 1933, only 6, 000 Canadian did, mainly due to unemployment.[8]

Figure 3.0: Real GDP Growth: Canada, Great Depression Era (1928-1935) Versus Great Recession Era (2008-2015).

Another further primary lesson of the Great Depression in Canada can be shown during the recovery phase of the 1930s. This was the importance of the regime change that could help in escaping the liquidity trap. In fact, the escape or exit from the Gold Standard by the United States, back in 1933, accompanied by the New Deal policies, adjusted the inflationary expectations and of course, produced a dramatic collapse in the real loan interest rates. More typically, abandoning the Gold-Standard rule restored the independence of the monetary policy, which, on the other hand, was valuable for many countries in the world, such as Canada, with no administration coordinating as well ass bedeviled by the stickiness of wages. This devolution promoted the early recovery and also made fiscal consolidation less painful.[9]

On the same issue in Canada, most scholars and economists still debate whether there were specific events that sparked the Great Depression, like the 1929 crash of the Wall Street Stock Market. However, there is a universal consensus that explains that this depression was as a result of the widespread drop, specifically in the commodity prices of the world and the sudden decline in the commercial credit and demand, which resulted to a rapid decline in the global trade and of course, raising the rate of unemployment. In Canada, such changes were dramatic. In fact, between the year 1929 and 1933, the Gross National Expenditure for the country, both for the public and private spending, fell by approximately 42%. By the year 1933, around 30% of the labor force was not working, and a rate of one in every five Canadian had become dependent upon the relief from the Government for their survival. These levels of unemployment remained above 12%, until the beginning of the 2nd World War, back in 1939. This is another lesson that can be learned from the Great Depression in Canada, where the rate of unemployed people increased.

Figure 4.0: Unemployment Rates: Canada, Great Depression Era (1928-1935) Versus Great Recession Era (2009-2015).

Application of Lessons Learned From The Great Depression on 2008 Financial Crisis

Most scholars and economists of history may agree that an underlying objective of studying any past events is to gain a more understanding of how to apply the lessons they provide to the future circumstances. Therefore, the parallels that lie between the 20th-century crisis and the Great Depression that happened during the interwar period, in the 1930s, have been examined by numerous economists. The conclusion of most of them is that the 2008 financial crisis indicates some of the historical economic lessons of the Great Depression were ignored or forgotten by the contemporary experts.[10]

Globalization played a significant role in making sure that the 2008 Financial Crisis became an international issue. Therefore, it resulted after the speculative bubble that was developed by the domestic United State real estate market, especially when it started to fall in on itself. Some of the issues that cause this recent crisis may be connected to an increased atmosphere of governmental deregulation as well as the downsizing that was experienced in the United States, particularly during the Carter and Reagan Presidencies of the 1980s. The era also coincides with the dissolution of U.S.S.R., which was an event that may have caused most experts to assert the victory of the United States plus the free market capitalism, compared to the Soviet Union style of economic ideologies.[11]

Furthermore, another global economic environment aspect which assisted in fueling the 2008 Financial Crisis was ending of the capital controls that most nations had imposed as a protective measure, with a primary aim of helping in rebuilding their economies after the destruction of the 2nd World War. The International Monetary Fund (IMF), by the year 1980s, placed a requirement for every country to discontinue their policies on the capital controls, as an aim or condition of membership. John Maynard Keynes, an English Economist, had advocated the capital controls as a technique for the states to re-create their entire economies after the war.[12] The removal of such control policies by many countries, by 1980s, imposed an important impact of exposing the states to a more economic uncertainty, mainly because of the increased involvement in the global economy. On the other hand, this had the effect of raising the domestic reliance that most nations had on the international markets, primarily by compounding the links between states. Therefore, it is clear that higher globalization of the economic markets builds an increased risk that policy failures in one nation will spill over and of course, experience similar adverse effects or externalities on others. This was a significant factor that resulted in the 2008 Financial Crisis, becoming an international economic recession.

However, according to Michael Bordo, from the Hoover Institution and Rutgers University, he presents an examination of the Fed’s role in the 2008 Financial Crisis that is rich in the historical analysis. The analysis notes that despite the popularity of the comparisons between the 2008 recession and Great Depression, the crises are not precisely analogous. In some instances, basing the policy on the lessons learned from the Great Depression can have exacerbated the 2008 economic strains and have resulted in severe problems that can contribute to the next crisis. In the earlier crisis, the money supply and of course, the deposit-to-currency-ratio collapsed, and in the recent crisis, both of them rose. Therefore, the 2008 Financial Crisis shows none of the commercial banks operated that market the Great Depression period and was an insolvency issue, instead of a liquidity issue.[13]

In conclusion, perhaps the economic historians and scholars can make a perfect contribution by making sure that the past events are not abused in debates on modern-day crises. For example, placing all the blame on the Wall Street to trigger the Great Depression or the Bankers in the current crisis, does not deserve the historical scrutiny. The entire responsibility can adequately lie in the complex factors combination, such as how the global financial systems are structured. However, this also requires being interpreted from the modern day’s evidence, instead of over-simplistic lessons from the past.

Also Study: What Were the Causes of The Great Depression

Bibliography:

Bordo, M. D., J. Landon-Lane, & a. Redish. (2010). Deflation, Productivity Shocks, and Gold: Evidence Froem the 1880-1914 Period. Open Economic Review, 21(4): 515-46
Crafts, N. F. R., & Fearon, P. (2013). The Great Depression of the 1930s: Lessons for today.
Eichengreen B., O’Rourke K. (2010) What Do the New Data Tell Us?, Retrieved from: www.voxeu.org/index.php
J.L. Granatstein et al, Twentieth Century Canada (1983); M. Horn, ed, The Dirty Thirties: Canadians in the Great Depression (1972); H.B. Neatby, The Politics of Chaos: Canada in the Thirties (1972); B. Palmer, Working-Class Experience: Rethinking the History of Canadian Labour 1800-1991 (1992); James Struthers, No Fault of Their Own: Unemployment and the Canadian Welfare State, 1914-1941 (1984).
Keynes, John M. “The Great Slump of 1930”. Project Gutenberg Canada ebook #197. Accessed December 3, 2014. https://www.gutenberg.ca/ebooks/keynes-slump/keynes-slump-00-h.html/
Kirshner, Jonathon. American Power After the Financial Crisis. Cornell University: New York, 2014
Krasner, S. and Jeffrey F. et al. (2009). International Political Economy: Perspectives on Global Power and Wealth. Norton: New York.
Krugman, P. (2009) “How Did Economists Get It So Wrong?” The New York Times. Accessed December 1, 2014. https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all&_r=0
Maddison A.,( 2010). Historical Statistics of the World Economy, 1–2008AD., Retrieved from: https://www.ggdc.net/maddison. Retrieved on: 12^th Nov 2017.
Wiegand, S. (2009). Lessons from the Great Depression for dummies. Hoboken, NJ: Wiley.
Wolf N. (2010) Europe’s Great Depression: The Failure to Coordinate Economic Policies after the First World War, Oxford Review of Economic Policy, vol. 263 (pg. 339-69)
[1] Maddison A.,( 2010). Historical Statistics of the World Economy, 1–2008AD., Retrieved from: https://www.ggdc.net/maddison. Retrieved on: 12^th Nov 2017.
[2] Keynes, John M. “The Great Slump of 1930”. Project Gutenberg Canada ebook #197. Accessed December 3, 2014. https://www.gutenberg.ca/ebooks/keynes-slump/keynes-slump-00-h.html
[3] Kirshner, Jonathon. American Power After the Financial Crisis. Cornell University: New York, 2014
[4] Eichengreen B., O’Rourke K. (2010) What Do the New Data Tell Us?, Retrieved from: www.voxeu.org/index.php
[5] Bordo, M. D., J. Landon-Lane, & a. Redish. (2010). Deflation, Productivity Shocks, and Gold: Evidence Froem the 1880-1914 Period. Open Economic Review, 21(4): 515-46
[6] Wolf N. (2010) Europe’s Great Depression: The Failure to Coordinate Economic Policies after the First World War, Oxford Review of Economic Policy, vol. 263 (pg. 339-69)
[7] Bordo, M. D., J. Landon-Lane, & a. Redish. (2010). Deflation, Productivity Shocks, and Gold: Evidence Froem the 1880-1914 Period. Open Economic Review, 21(4): 515-46
[8] Crafts, N. F. R., & Fearon, P. (2013). The Great Depression of the 1930s: Lessons for today.
[9] Wiegand, S. (2009). Lessons from the Great Depression for dummies. Hoboken, NJ: Wiley.
[10] J.L. Granatstein et al, Twentieth Century Canada (1983); M. Horn, ed, The Dirty Thirties: Canadians in the Great Depression (1972); H.B. Neatby, The Politics of Chaos: Canada in the Thirties (1972); B. Palmer, Working-Class Experience: Rethinking the History of Canadian Labour 1800-1991 (1992); James Struthers, No Fault of Their Own: Unemployment and the Canadian Welfare State, 1914-1941 (1984).
[11] Krasner, S. and Jeffrey F. et al. (2009). International Political Economy: Perspectives on Global Power and Wealth. Norton: New York.
[12] Keynes, John M. “The Great Slump of 1930”. Project Gutenberg Canada ebook #197. Accessed December 3, 2014. https://www.gutenberg.ca/ebooks/keynes-slump/keynes-slump-00-h.html
[13] Krugman, P. (2009) “How Did Economists Get It So Wrong?” The New York Times. Accessed December 1, 2014. https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all&_r=0

The Great Depression In The Canadian Economy

Introduction

Lessons Learned From The Great Depression In The Canadian Economy

Application of Lessons Learned From The Great Depression on 2008 Financial Crisis

Bibliography:

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