In the autumn of 1929, Canada descended into the worst economic depression in its history. It was a national and global catastrophe. The cycle of “boom and bust” had gone on for centuries, with periods of high economic activity followed by periods of stagnation, falling income, unemployment, and poverty. The recession that began in 1929 quickly became far worse than previous ones. To protect their assets, banks called in loans and the amount of money in circulation declined. As people spent less, factories laid off more and more employees, the unemployment rate in Canada jumped to over 20 per cent, and farmers and others received less for their products.
Canadians who ran out of money went to their municipal offices to obtain relief so they could pay the rent and purchase food and fuel. There was nothing new in this—in the recession that followed the First World War, municipalities had provided relief to needy individuals and families, and those programs had been maintained in the 1920s. What was new in 1929 was the overwhelming demand. Municipal governments could not deal with the crisis; provincial governments had to come to their assistance, and it was soon clear that the municipalities and provinces did not have the financial resources to handle the demand. By then, the federal subsidy had fallen from 60 per cent of provincial revenue in 1867 to 10 per cent, while the cost of provincial responsibilities had risen significantly. The provinces had all been borrowing heavily to meet their needs, while the federal government balanced its budgets, paid down its debts, and began launching major and permanent programs in provincial areas of responsibility. The Depression brought the problem of this “fiscal imbalance” to the fore of the federal-provincial agenda.
When this crisis was debated in the House of Commons on April 3, 1930, the Opposition accused Prime Minister Mackenzie King of being heartless. King lost his temper and said that he would not give “a five-cent piece” to a Conservative provincial government. R.B. Bennett, Leader of the Official Opposition, said what Canadians wanted to hear—if elected, his government would provide action. He was elected, and on July 28, a special session of Parliament approved $20 million in immediate assistance for the provinces. There was no precedent for such a sum; it amounted to almost 5 per cent of the federal budget, ten times the amount Ottawa had spent on relief since the First World War. The grants were unconditional, but the municipalities were to pay for the first 50 per cent of relief, the provinces for the next 25 per cent, and Ottawa for the remaining 25 per cent. This was sound accounting practice, but it produced a very serious distortion. The poorest municipalities could not pay their share so they could not receive the provincial share, and the poorest provinces could not qualify for the federal payment. In the perverse way that welfare sometimes works, taxes collected in the poorest municipalities and provinces were actually being transferred to the richest, the reverse of what was needed.
Ottawa soon abandoned the 50–25–25 formula in favour of one under which each government would pay one third. That was more wishful thinking, since many municipalities could not pay their third and neither could the Prairie provinces. Nevertheless, this formula remained on the agenda throughout the Depression, although Ottawa paid different percentages of relief costs in different provinces, and the provinces paid different percentages of the costs of their municipalities. The federal share eventually worked out to around 40 per cent, not some mathematical and bureaucratic division of one-third each across the country. This and other welfare issues created a set of federal-provincial squabbles that lasted throughout the decade.
The situation was complicated by the facts that unemployed people migrated from rural areas to cities, from city to city, and from province to province, so that those who applied for relief might not be resident in the municipalities and provinces where they made the application. This became one of the most cogent arguments for federal schemes covering all the needy, wherever they might be. While providing this assistance, Ottawa made two things very clear. One was that the federal government had no permanent responsibility for relief, and it was just providing some financial assistance to help the provinces in hard times. The second was that the assistance was short-term, because it was assumed that the economic slow-down was a temporary phenomenon. The economy would presumably right itself in a short time, and everyone hoped things would get better “next year.”
Independence and Amending the Constitution
In the meantime, another federal-provincial issue was developing. Canada remained a colony after 1867, but step by step, it moved towards independence. In 1926, Britain acknowledged the independence of its self-governing Dominions and work progressed on implementing that decision. One problem was that Britain could not simply declare that Canada was independent, as only Britain could amend the Canadian constitution. No solution emerged at the federal-provincial conference of 1926, and the question arose again in 1930. Premier Howard Ferguson of Ontario was concerned that independence might leave the federal government in sole control of amending the constitution. He argued that the BNA Act resulted from an agreement among the provinces and that it could only be amended with the consent of all nine provinces. Other premiers, particularly Quebec’s Louis-Alexandre Taschereau, supported him, and Prime Minister Bennett promised that there would be no amendments without consultation with the provinces.
No agreement was achieved so the 1931 British Statute of Westminster, which recognized Canadian independence, included a statement that the Statute did not overrule the BNA Act. Britain would continue to make amendments anytime it received a request from the Parliament of Canada, but a request that affected matters of provincial responsibility would require the support of the provinces. Bennett made this very clear when he addressed the House of Commons on June 30, 1931. He referred to “the apprehension of some provinces that . . . a Dominion government might encroach upon the jurisdiction of a provincial legislature. . . . Lest it be concluded . . . that the rights of the provinces as defined by the BNA Act had been by reason of this Statute curtailed, lessened, modified, or repealed, a section of the Statute . . . declared, with the unanimous consent of the provinces, that such was not the case.”
Failure to Deal with the Depression
While these constitutional problems were unfolding, the earlier optimistic hopes for an end to the “recession” of 1929–30 were proving unfounded. Bennett’s massive infusion of $20 million into provincial relief programs, his plans to reverse the recession with huge increases in tariffs, and his other efforts to deal with the crisis were unsuccessful. Unemployment in 1930–31 remained at very high levels, and the Prairie provinces continued to face bankruptcy. Bennett called for a federal-provincial conference for 1931 to discuss the overall situation and the possible solutions. It resulted in a continuation of the federal grants, but the acrimonious debates harmed relations between Bennett and the premiers.
Further federal-provincial conferences in the early 1930s failed to deal with the Depression. Bennett kept demanding that the provinces tighten the administration of relief, but the provinces lacked the funds to help all those who needed assistance. In July 1931, he introduced the Unemployment and Farm Relief Act to provide grants to the provinces for make-work projects. Such projects created new infrastructure, but cost far more than direct relief because material had to be bought. After a year of experimenting with make-work projects, Bennett informed the 1932 federal-provincial conference that Ottawa was terminating them. Three issues were now entangled: the financial weakness of the provinces, the issue of unemployment insurance that the federal government was advocating as a panacea to the economic problems, and the fact that the constitution would have to be amended because unemployment fell within provincial jurisdiction.
Unemployment insurance, UI, was quite different from relief. The idea behind it was simple in theory: namely, to establish a system whereby employers and employees paid an insurance premium into a fund, and when a person became unemployed, the fund would pay a minimal amount until the person found another job. Such a program had to be compulsory, apply to all provinces, and be managed by government. The scheme would not cover short-term workers or the more than one million people on relief. In the short term, the introduction of a UI scheme would have made the situation worse, because employees and employers would have less to spend after paying their premiums. The amount of money in circulation would have declined, exactly the reverse of what was needed when deflation was a principle cause of unemployment. One major winner from an unemployment insurance scheme would be whichever government implemented it. It would have collected premiums for months before having to make any payments, and the employers and employees would have paid for the first forty weeks of relief for a worker who lost his or her job. UI was, in effect, a method of increasing taxes on companies and employees. That explains in considerable measure why Ottawa and the provinces spent much of the Depression fighting over control of any new program. As a result, not one Canadian benefited from any UI scheme during the 1930s.
As the Depression ground on, Bennett continued to transfer large amounts of money to the provinces, usually without conditions. By 1932, that money was spent and the situation remained the same, if not worse. Many people thought that the provinces were not administering the funds properly, that the “easy money” was encouraging laziness, and that unqualified people were taking advantage of the programs. Bennett began cutting back on the grants and attempting to introduce some form of accountability for the funds. That was a problem for every province, and to them, it represented a violation of the constitution and unwarranted federal interference in provincial jurisdiction.
At a federal-provincial conference in 1932, Bennett proposed an amendment to allow Ottawa to introduce a UI scheme in which the provinces would have to provide some of the initial funding. Premier Taschereau asked what it would cost, but Ottawa had not worked out any of the details. The premiers were not enamoured with a request for a blank cheque without any idea of how effective or costly such a program might be. This conference, like all the others, was not helped by the fact that Bennett was a terrible chairman with a strong penchant for bullying and little talent for compromise. The conference was a failure, and unemployment remained at 30 per cent with 1.5 million people on relief.
By January 1933, the western provinces were again facing bankruptcy, but Ottawa remained inflexible. The gulf between them was widening, with the provincial governments focused on dealing with those who needed relief while Ottawa seemed more interested in a UI scheme and the constitutional amendment that program would require. In March, Bennett told the four western premiers that they would have to place their spending under federal control in order to receive further aid. They were outraged because their situation was so desperate and obvious. Manitoba, for example, was spending 55 per cent of its budget on interest payments, and the idea that it required federal supervision of the portion left over for everything else, including relief, seemed ridiculous. Other provinces such as Ontario were still demanding that Ottawa stop collecting direct taxes so they could pay for relief. Ottawa refused. Another federal-provincial conference failed to produce agreement, and Ottawa had to continue paying part of all provincial relief costs and making loans to the western provinces.
In 1933, the electorate of BC began writing a new chapter in the history of the Depression when it elected a Liberal government under the leadership of the flamboyant, energetic, and open-minded Duff Pattullo. He was possibly the first Canadian politician to move beyond aiding the victims of the Depression to addressing the root causes of it. His plan was for a massive government investment in infrastructure called “work and wages,” so massive it would wipe out unemployment. At a time when Ottawa was grudgingly granting around $40 million annually to the provinces out of a budget of around $500 million, he proposed an $800-million federal program, with Ottawa to spend $200 million on its own public works and loan $600 million to the provinces for theirs. He also urged Ottawa to establish a central bank, which could increase the money supply, an idea championed a few years later by Alberta’s Social Credit government. Bennett refused to help with Pattullo’s plan or listen to his advice on creating credit.
By this time, BC was having serious problems borrowing money on the market and was dependent on grants from Ottawa, which insisted on limitations on BC’s budget deficit. Pattullo decided to launch his program, even though it would produce a deficit of $2 million. Ottawa refused to extend more loans, and BC headed towards bankruptcy. Pattullo accused Ottawa of trying to run the province, and demanded that Ottawa provide more assistance and stop collecting direct taxes. Bennett was forced to back down because a declaration of bankruptcy by a province like BC would harm Canada’s credit rating.
Pattullo was a Keynesian economist years before John Maynard Keynes published his famous study in 1936, and he made a very prophetic comment about the Depression and the Second World War: “If [there was] another war, they would use the last dollar . . . They’d use the national credit . . . That’s what we propose to do. We will use the national credit for a war on poverty.” Unfortunately, provinces did not control the “national credit,” but in 1939 Ottawa spent its way out of the Depression by fighting a war on Germany, as he had predicted. Pattullo was the first premier to argue that deficit spending and increasing the amount of money in circulation could solve the economic crisis—other premiers would join him, but Ottawa rejected his theory.
In December 1933, the four western premiers asked Ottawa to take over relief for transients and the homeless, to establish a federal UI scheme, to refinance provincial debts, and to introduce more programs for relief work. Bennett was not interested. On January 17, 1934, he told the provinces that Ottawa was going to stop providing assistance by the end of July because, in his view, the provinces were wasting money. This was the background to the failed federal-provincial conference of January 1934. At the next conference, Bennett argued again that the municipalities were wasting money and that the provinces were trying to shift the burden of responsibility to Ottawa, but refusing to transfer power. Accordingly, Ottawa would no longer provide for one-third of provincial relief.
Bennett’s new plan called for the provinces to prove their level of need, after which they would receive federal funds. In the meantime, each province was told how much money it would receive over the next six months. There was no consistency to the calculations, so they appeared to be as much political as financial. The premiers were furious. There had been no consultation and the new proposals represented a 22 per cent decline in funding. The provinces cancelled public works projects and unemployment increased, but the federal deficit fell to $20 million, the lowest it had been since 1929. Ottawa then launched its own public works program with a budget of $40 million.
By then, politics had become a serious complicating factor. When the Depression began, six of the nine provinces had Conservative governments. By 1935, four of them had fallen to the Liberals: BC and Nova Scotia in 1933, Ontario and Saskatchewan in 1934, with New Brunswick and PEI set to go Liberal in 1935. Bennett was as aware as Mackenzie King that provincial parties supported their federal cousins, and that the more he gave Liberal provincial governments, the better it was for the Liberal Opposition. The Liberal premiers were equally aware of the politics of it all, and federal-provincial conferences became more strained as more of the seats around the table were occupied by new Liberal premiers such as Pattullo and Ontario’s Mitch Hepburn. It was also increasingly clear that the Conservatives were heading for defeat when their mandate expired in the summer of 1935.
By the autumn of 1934, several things had become clear. The early predictions that the Depression was a short-term phenomenon seemed like ancient history. The routine of saying that every year’s federal grants to the provinces were a one-off adjustment had become meaningless. The federal government’s position that it had no responsibility for relief had become a myth. The Depression was leading to the rise of extremist governments in Europe and to increasingly radical ideas in Canada and the emergence of strong socialist parties. Finally, it was clear that the provinces were not going to approve any amendment that transferred their responsibilities to Ottawa unless Ottawa made some equal gesture to strengthen provincial taxation powers.
Bennett’s New Deal
In the late fall of 1934, an increasingly desperate Bennett made some fateful decisions. He concluded that he had done everything possible under the existing system, so the system itself had to be changed. Since the provinces would not agree to transfer responsibilities, he would simply seize those powers through legislation. He concluded that free enterprise was no longer working and that massive government interference in the free market was required—federal interference, of course. Typically, he kept his thinking largely to himself. On January 3, 1935, a surprised nation, including his own cabinet, heard Bennett announce the most sweeping changes to government, the economy, and federal-provincial relations that had ever been put forward. And this was to be implemented in spite of the views of provincial governments or the BNA Act.
Bennett’s New Deal program contained eight important pieces of legislation. Three of them, known as Hours of Work, Weekly Rest, and Minimum Wages, were designed to create more jobs by reducing the amount of work done by those who had jobs. The Insurance Act would establish a federal UI scheme. The Dominion Trade and Industry Commission Act and the National Products Marketing Act were meant to control companies, and the Farmers Creditors Arrangement Act would assist agriculture. Finally, an amendment to the Criminal Code called the Price Spreads Legislation would prevent companies from gouging customers. All of these measures would allow Ottawa to regulate the economic activity of individuals and companies, effectively putting an end to free enterprise or laissez-faire economics, as well as provincial responsibility for these matters. None called for increasing spending or the money supply, the two policies that would have addressed the underlying causes of the Depression.
In the upcoming election, Bennett’s challenge was to convince the public that he had discovered the right solutions and was best suited to implement them. That was a very difficult proposition, because he had argued for four and a half years that the Depression was a temporary emergency and that free enterprise worked in the long term. There were obvious constitutional issues, and the provincial governments of all political stripes were opposed to Bennett’s deal. To many, Bennett’s New Deal looked like an insincere act of desperation, and he could not shake the public’s perception that he had failed. It was not for lack of effort, though. In 1930, Bennett had recognized the seriousness of the problem, had promised dramatic action, and had taken it. For four years, he had experimented with different types of relief and different arrangements with the provinces. None had worked, and in 1935, he proposed the most radical solutions ever seen in Canada.
Mackenzie King’s Approach
Mackenzie King had not changed his views since 1929, namely that governments should balance their budgets through increased taxes and reduced spending. Keynesian economists would later say that these were the worst possible policies to follow. He had consistently criticized federal assistance to the provinces, and he was, in fact, far more conservative than Bennett. He made no promises to deal with the Depression because he did not have to. He said that the constitutionality of the New Deal legislation would have to be verified, but not what he would do if it was found to be within Ottawa’s power. That was not a serious matter for the public, however, and constitutional experts had mixed views about the package of reforms. In the 1935 election, the Liberals actually lost popular support, but their 45 per cent of the vote was concentrated in the right constituencies and their representation in the Commons jumped to 173 of 245 seats, a solid majority that they hoped would outlast the Depression.
After the election, King vowed that there would be no more handouts to the western provinces. His first federal-provincial conference focused on the usual three issues: aid to the provinces, UI, and amending the constitution. The provinces wanted Ottawa to guarantee their loans so they could borrow at a much lower rate of interest. That would cost Ottawa nothing, but King demanded control over their spending and repeated Bennett’s demand for the establishment of a loan council. That meant surrendering sovereignty to Ottawa, and the provinces refused. The provinces again asked Ottawa to withdraw from the field of direct taxes; it refused. The provinces demanded that Ottawa stop taxing mining companies since natural resources were provincial; it refused.
Politics intervened to temper King’s tough approach. The Liberals owed their election in considerable measure to the support of Canada’s six provincial Liberal governments, and King’s cabinet colleagues said that those provinces had to be rewarded with larger federal grants. King was forced to increase funding to the provinces by 75 per cent. In return, all the provinces except BC, Alberta, and Ontario, agreed to co-operate with the proposed National Employment Commission, whose main purpose was to examine provincial expenditure. Once the political debt had apparently been paid, King went back to the pursuit of his policies by cutting the grants by 25 per cent. Now King had his Commission, and the provinces saw their grants shrink—they had been betrayed. Needless to say, Liberal Ottawa’s honeymoon with the Liberal provinces was very short-lived, and the relationship was soon as strained if not more so than Bennett’s had been.
King referred Bennett’s New Deal legislation to the Canadian Supreme Court. The federal side was headed by the brilliant lawyer and future prime minister Louis St. Laurent, while the provinces sent their attorneys general and deputy ministers. The Court divided 3–3 on the three labour acts, Minimum Wages, Hours of Work, and Weekly Rest. The Dominion Trade and Industrial Commerce Act was declared unconstitutional by a 6–0 vote on the grounds that it affected property. St. Laurent argued that there was an emergency, and the Insurance Act was therefore federal under the peace, order, and good government clause. In a 4–2 decision, the Court said that if there was an emergency, then the legislation had to be limited to the emergency and not be a permanent transfer of power.
The Supreme Court rejected the federal argument that since it could collect money by any means, it could spend it on anything it chose, the so-called spending power. The Court said that Ottawa could not use the power of spending money to “indirectly accomplish” its goals. Otherwise it “would be permitted to invade almost any field exclusively reserved . . . to the legislatures in each province . . .” It rejected the argument that since the insurance premiums would be compulsory, they were a form of taxation for which Ottawa had unlimited power, and it upheld previous decisions that insurance was a form of property. The National Products Marketing Act was rejected on the grounds that trade and commerce did not trump provincial responsibilities and that commercial transactions were provincial. Finally, the court upheld two acts, the Price Spreads Legislation Act and the Farm Credit Act, as matters of banking, which was federal. The decisions were appealed to the JCPC in London, which upheld five of the Canadian court’s decisions. While the Canadian Supreme Court had divided 3–3 on the three labour acts, the JCPC declared all three beyond federal power.
The JCPC’s reasoning applied to a number of the underlying issues. Regarding federal spending power, it said that while Ottawa could collect funds by any method, “it by no means follows that any legislation which disposes of it is necessarily within Dominion competence.” It supported the Supreme Court’s argument that the peace, order, and good government clause did not give Ottawa the right to legislate on labour matters. Ottawa had also argued that it had the right to sign international treaties and then, under Section 132, apply them to the provinces. The JCPC rejected that argument, ruling that Section 132 applied to laws signed by the British government, not by Canada. That meant that Ottawa could only enter international agreements on matters within provincial jurisdiction if the provinces agreed. Lord Aikens summed up the decisions in a phrase that would become a famous definition of federalism. He said that while there had been evolution, the federal “. . . ship of state . . . still retains watertight compartments which are an essential part of her original structure . . .”
The New Deal legislation included some of the most important federal-provincial cases ever to go before the courts. The courts did not say that the constitution prevented Canadian governments from implementing the elements in the New Deal. They only said that six of the acts were in provincial jurisdiction and so the federal government could not implement them. There was nothing preventing provincial governments from passing such legislation if that was what they and their electorates wanted. It was not, therefore, the courts or the constitution that prevented politicians from taking action to end the Depression. The simple fact was that the provinces lacked the financial means to deal with the problem, and the federal government was unwilling to spend the money required. That was a political decision, not the effect of any constitutional restraint on its ability to deal with the problems. Ottawa had the main responsibility for agriculture, but it was Alberta’s Premier William Aberhart and Quebec’s Premier Maurice Duplessis who took the lead in protecting farmers from foreclosures on their mortgages. Ottawa could have built a trans-continental highway, just as it had built the CPR fifty years earlier. Finances were not a serious restraint either—a few years after the Depression, Ottawa increased its spending by 600 per cent.
Continued Stalemate
Instead of increasing spending on matters that were within its constitutional rights, Mackenzie King began cutting back on federal grants. Alberta did not have sufficient revenue to pay the interest on its bonds, but King refused to make another loan unless Alberta accepted supervision of its finances. Alberta then unilaterally reduced the interest rate on some bonds, in effect, defaulting on them. Saskatchewan was nearing a deadline on its bonds and could not pay the interest on them. If a second province defaulted, Canada’s credit rating would be even more seriously harmed. Mackenzie King’s strategy of toughing it out with the provinces had failed just as Bennett’s had failed—King had no choice but to loan more money to the near-bankrupt provinces to protect Canada’s credit rating.
Since 1930, the federal government had believed that some provinces and municipalities were wasting money, a belief held mainly by the rich and those with jobs. Mackenzie King shared that belief, and he established the National Employment Commission, or NEC, in 1936 to identify abuse and recommend better ways for dealing with unemployment. That Commission failed to find much evidence of abuse, but it did acquire real knowledge about the level of distress. As a result, its sympathies began to shift from a belief in the policies and attitudes of the federal government towards an understanding of the hopeless situation so many people were facing. Another of King’s responses has received far more attention from academics, and that was the establishment of a Royal Commission to investigate the relationship between the finances and responsibilities of the two orders of government and to recommend changes to the constitution to address the imbalance. It was known after its chairmen as the Rowell-Sirois Commission. Although its mandate was to deal with the Depression, there was good reason to believe that King’s real goal was to create an excuse to avoid action until the global economy rebounded. Evidence supporting that interpretation included the fact that a commission was first suggested in 1935, was only established in 1937, and did not report until 1940.
The mandate was also not quite as balanced as it appeared. Its real purpose was to study the imbalance within provincial finances and responsibilities. That imbalance had been known since 1864 and had gradually worsened, in part because of federal policies. The solutions were well known too. Either provincial responsibilities had to be transferred to Ottawa or some of Ottawa’s taxing power had to be transferred to the provinces. Since this was a federally appointed commission, there was little doubt that it was expected to recommend the transfer of provincial responsibilities to Ottawa. The Commission received strong support from the poorest provinces and from Canada’s left-wing and nationalist English-speaking elites, all of whom wanted a stronger federal government and more federal spending. The only source for any such transfers was the richer provinces of Ontario, Quebec, and BC, whose governments naturally saw the Commission as a threat. Playing rich and poor provinces against each other was the politics of divide and conquer, a good divisionary tactic for Ottawa, which could put the blame for inaction on the inevitable inability of the provinces to reach agreement. It offered no help dealing with the Depression.
Ontario’s new Liberal Premier Mitch Hepburn became one of the Commission’s most bitter enemies. BC’s Premier Pattullo had no interest in participating in an academic exercise that might challenge his province’s autonomy. Alberta’s new Social Credit Premier William Aberhart was already at war with Ottawa over a number of issues, and he refused to meet the Commission. Premier Duplessis of Quebec argued that the federal government had no right to appoint a commission to study provincial finances. In Quebec City, Duplessis hosted the commissioners at a dinner at the Chateau Frontenac. He got quite drunk and began throwing wine glasses at the chandelier; one frightened federal civil servant considered himself lucky to have escaped down a staircase.
Hepburn made his position clear at his first meeting with the Commission in May. He said that federalism should be discussed by politicians, not a commission, and complained that prior to its appointment, Ottawa had consulted the western provinces, but not Ontario. Ontario would have to pay 50 per cent of any increased federal assistance, and any change would be towards increasing federal powers, which Ontario would never accept. He asserted that Canada was heading towards dictatorship. Instead of centralizing power, Ottawa should withdraw from the field of direct taxes, which it had entered as an emergency measure and then continued to exercise, contrary to the spirit of Confederation.
The detailed Ontario brief said that the problem was financial, not constitutional, and the federal subsidy to Ontario had fallen from 60 per cent of Ontario’s revenue in 1867 to 3 per cent in 1937. Ottawa had also started taxing the mining and forestry industries that the constitution assigned to the province. The very idea of a federal role was questioned, as Hepburn pointed out that there were wide differences of opinion in Canada regarding state involvement in the economy and that the issue should therefore be left to each province. The Rowell-Sirois Commission thus had no hope of producing recommendations that would be acceptable to the four largest provinces, and the constitution could not be changed without their agreement.
Alberta’s Social Credit Legislation
In the meantime, one provincial government had decided that there were solutions to the Great Depression, and that it would implement them unilaterally. That was the Albertan Social Credit government of William Aberhart. Social Credit was one of the most curious political phenomena in Canadian history and Aberhart one of the most interesting personalities. He was a very successful high school principal in Calgary and an even more successful radio evangelist. One evening in 1932, he read an account of the social credit theories of William Douglas and decided that they contained the answer to the Depression.
Neither Douglas nor Aberhart were ever able to explain very clearly what Social Credit was, but the basic idea was neither profound nor new. It was, quite simply, that depressions or recessions occurred when the amount of money in circulation was not sufficient to enable people to purchase the amount of goods that had recently been produced. As a result of the gap, goods went unsold, stores cut back their orders, factories laid off workers, the unemployed had less to spend, stores cut back their orders even more,
factories laid off even more workers, and the vicious circle continued. That was actually quite an accurate analysis of what had happened in Canada since 1929 as the private banks had restricted the money supply, which reduced demand for goods and services, which then led to more unemployment.
The solution to this situation, according to the theory, was for governments to put money into the hands of consumers so they could purchase the goods that were sitting in the stores. The stores would send new orders and re-hire the unemployed workers to produce more. These workers would spend their new paycheques, stores would send more orders to refill their shelves, and the vicious circle would be broken. All this activity could be taxed to pay back the government’s initial infusion of credit, and it would not therefore lead to inflation. This was a variation of theories of “soft money” that had circulated in the United States and western Canada for decades. So the main tenet of Social Credit was to increase the money supply, something either banks or governments could do if they wished. The theory had history on its side, as increases in the money supply in the past had ended depressions, the most famous example being the discovery of gold in South Africa in 1896, which ushered in the prosperous years before the First World War. There were no similar discoveries of gold or silver on the horizon, but banknotes were the other form of currency and nothing prevented governments or banks from issuing them.
With a new offer of hope, Aberhart led his new Social Credit party to a resounding victory in 1935. His government took a number of positive steps, but it had no idea how to implement its economic policy, partly because issuing currency was a federal responsibility. Time passed, and in 1937 a backbench revolt forced the government to act. It then passed a number of bills to regulate banking and currency. These were clearly federal matters, and Ottawa used its power of disallowance to overturn some of the legislation while the Supreme Court declared the rest to be beyond provincial power. The rejection of both the provincial Social Credit legislation and the federal New Deal represent one of the great paradoxes of Canadian history and perhaps the great tragedy of the Depression. The courts did not say that Canada could not have these laws, only that the federal government could not implement the New Deal legislation because those issues were provincial, and Alberta could not implement the Social Credit legislation because those issues were federal. The problem was not in the laws, but in the fact that it was the wrong government that was trying to pass them.
Interestingly, while Ottawa was vetoing the Albertan legislation, officials in the Bank of Canada and the Department of Finance were looking at ways to increase the money supply. Mackenzie King was far too conservative to accept such advice, but the outbreak of the Second World War changed his view. In the autumn of 1939, Ottawa issued hundreds of millions of dollars’ worth of contracts for war material, recruitment, and other wartime needs. A small portion of the money came from credits created for the Department of Finance by the Bank of Canada. Since then, Ottawa has “created” credit when it felt that the economy required stimulus. There was, in fact, no financial or constitutional constraint preventing Ottawa from increasing the money supply during the Depression; the problem was conservative political attitudes.
Creating credit was one way of dealing with the causes of the Depression; massive spending on public works was the other. By the late 1930s, a serious gulf had opened up between three provinces and Ottawa on the issue of borrowing money specifically to create jobs. As early as 1933, BC’s Premier Pattullo had advocated a massive program of public works to stimulate the economy. After his election in 1934, Ontario’s Premier Hepburn began to urge the same policy. In 1936, Quebec’s new Premier Duplessis began massive borrowing to spend on infrastructure, rural electrification, and loans to farmers so they could avoid defaulting on their mortgages. Years later, economists would be almost unanimous in saying that these were the correct solutions to the Depression, namely deficit spending to stimulate economic activity and increasing the money supply by having the Bank of Canada create credit.
Although the crisis dragged on into its seventh and eighth years, Mackenzie King’s thinking had still not evolved since 1929, and he continued to believe that the solution lay in governments balancing their budgets. He was, however, increasingly under pressure from three different groups within Ottawa. One was his own cabinet, where more and more ministers came to agree with Minister of Labour Norman Rogers, who believed the government should be spending far more money. In the civil service, the governor of the Bank of Canada, Graham Towers, and Deputy Minister of Finance William Clark were coming to the same conclusion. A third source of pressure came as a surprise to King, indeed, as a shock. In May 1936, the government had set up the NEC with the mandate of searching out waste in provincial welfare programs and making recommendations to lower unemployment. It had failed in its first task because there was not much waste, but it did recommend a way to deal with unemployment, namely, a sharp increase in federal spending. On December 20, Arthur Purvis, the Chair of the Commission, recommended that Ottawa assume total financial and administrative responsibility for aid to the unemployed.
King was enraged when he heard the proposal. He was even more horrified when he discovered that Labour Minister Rogers had known for two months that these recommendations were coming. The prime minister regarded as treasonous the fact that his minister had not kept him informed of the Commission’s thinking. King also found out that Deputy Finance Minister Clark had agreed with the recommendation and was drafting a budget to increase spending on relief. After a stormy cabinet debate, the Commission was ordered to change its recommendation to suit King’s views. It made modifications but would not change the basic thrust. King then did what he was best at, namely procrastinating, this time with the excuse that the Rowell-Sirois Commission had not yet reported. The political crisis passed; the crisis for those on welfare remained unchanged.
At the beginning of 1938, King was still determined to balance the budget, which would require cutting spending by $70 million. That was difficult politically, as the number of persons on relief increased from eight hundred thousand in October to one million in March. Finance Minister Dunning planned to introduce a balanced budget, but Rogers argued that $75 million should be borrowed and spent on public works. King and Dunning were appalled and the finance minister threatened to resign. Then Rogers threatened to resign. King, ever the superb politician and compromiser, cut the difference roughly in half and had Cabinet agree to spending $40 million on housing, roads, tourism, and manpower training. This looked like Canada’s first Keynesian budget, but Dunning rejected Keynes when he introduced the budget. Ottawa had not adopted Keynesian economics, and the small budget deficit did not end the Depression. The Depression ended as a result of the outbreak of the Second World War in September 1939. Ottawa saw that challenge as justification for a massive increase in spending on the military—just as BC’s Premier Pattullo had predicted seven years earlier.