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Late Nineteenth Century Business Cycles in Canada*

Published online by Cambridge University Press:  07 November 2014

Edward J. Chambers
Edward J. Chambers*
Affiliation:
University of Washington
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Extract

The last third of the nineteenth century, covering the years from Confederation until the beginning of the era of rapid expansion on the Western prairies, was a formative period for Canada. It is surprising that this period has as yet received little attention from economic historians, for analyses of demographic and economic changes during these years may yield high returns in the form of a more sophisticated interpretation of Canadian development.

One of a number of important yet neglected aspects of these years in Canada is the business cycle, and the purpose of this paper is to report some new research in this area. A study of business cycles, as opposed to “panics,” implies the existence of a clearly defined cyclical sequence that becomes apparent once an economy has reached a certain state of commercialization. While the process of commercialization in Canada generally lagged behind that in the United States it is clear that even before Confederation a viable market economy had been created in the united province of Ontario and Quebec. There is good reason to believe that by the time of Confederation factor and product markets were functioning quite smoothly and that the price system was playing a prominent role in allocating resources.

The two most authoritative, though far from definitive, accounts of cycles and growth in the late nineteenth century are contained in the works of Breckenridge and Skelton. Other students of Canadian economic history have relied heavily upon Skelton's findings about the pace and nature of activity in the post-Confederation years. Skelton concludes that the short period from 1869 to 1873 was a prosperous one, despite the abrogation of reciprocity with the United States, because (1) exports to the latter were well maintained, (2) Canadian producers were successful in finding new domestic markets, and (3) there were expanding sales to the United Kingdom. In contrast the period from the mid-seventies through the mid-nineties he considered to be “Days of Trial” during which Canada waited grimly for a favorable turn in its economic fortunes. In the late nineties Canada's “hour had struck” with emerging opportunities for agricultural expansion in the prairie west.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 30 , Issue 3 , August 1964 , pp. 391 - 412
Copyright
Copyright © Canadian Political Science Association 1964

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Footnotes

*

The author expresses his appreciation of financial assistance received from the Institute for Economic Research, Queen's University, and the College of Business Administration, University of Washington.

References

1 Breckenridge, R. M., “Canadian Banking System, 1817–1890,” in Journal of the Canadian Bankers' Association, II, 1894–1995, 334 ff.Google Scholar; and Skelton, O. D., “General Economic History, 1867–1912,” in Shortt, Adam and Doughty, Arthur G., eds., Canada and Its Provinces (Toronto, 1914).Google Scholar One should also note the inclusion of Canada in Thorp, Willard, Business Cycle Annals (New York, 1926), 299 ff.Google Scholar

2 See Skelton, “General Economic History,” the sections entitled “The Ebb and Flow of Prosperity,” and “Days of Trial,” 135 ff. He may well have been influenced by the substantial body of economic literature that regards the last quarter of the nineteenth century as one of long-wave depression for the English-speaking members of the North Atlantic community. Research of recent years has raised some serious doubts about the use of this term to describe the period. Cf. Kuznets, Simon, “Long Term Changes in The National Income of the United States of America since 1870,” in Income and Wealth of the United States, Trends and Structures (London, 1952), 36–8Google Scholar; and Rostow, W. W., The Process of Economic Growth (New York, 1960)Google Scholar, especially chap, III, “Investment and the Great Depression.”

3 Heavy reliance was placed on the Monetary Times, a Toronto weekly, which is the best single source of commentary on the economic conditions of these years, and the reports of the annual meetings of the chartered banks particularly after the early eighties. Also helpful were the Budget Speeches of the Ministers of Finance though they vary greatly in emphasis and quality; the debate on the Speech from the Throne; The Report of the Select Committee to Enquire into the Causes of the Present Depression of the Manufacturing, Mining, Commercial, Shipping, Lumber and Fishing Interests, Sessional Paper 39, 1876; Annual Reports of the Montreal Board of Trade; annual reports of the Ontario Bureau of Industries, 1883-1889; agency circulars of the Bank of Nova Scotia 1882–1897; and comments upon business conditions in the personal correspondence of Thomas Fyshe, cashier (general manager) of the Bank of Nova Scotia, in the post-1876 years.

4 Space precludes full discussion of changing seasonal patterns evident during the period. In general, the most striking development was marked reduction in the amplitude of the seasonal indexes, particularly in the foreign trade series. Between 1876 and 1898, for example, the seasonal lows and highs for merchandise imports changed as follows:

There was little reduction in the amplitude of seasonal swings in this series in the years at the turn of the century, and by 1913 it had even increased slightly from a monthly low of 88.0 in January to a monthly high of 120.1 in March. This increase in amplitude and shift in seasonal pattern became evident in the decade prior to the First World War when prairie expansion was fully under way.

There are a number of possible explanations for reduced seasonal amplitude in the period examined here. One of these is associated with the virtual completion of the rail transport network in Central and Eastern Canada. Costs of transportation were reduced and obstacles imposed on the river and canal movement of goods by the relatively severe Canadian weather were removed.

5 Firestone's annual GNP estimates are found in Canada's Economic Development, 1867–1953, Income and Wealth Series, vol. VIII (London, 1958), 276.

6 Edward J. Chambers, “Merchandise Exports and Business Cycles,” this Journal, Aug., 1958, 406–10.

7 Edward J. Chambers, “Canadian Business Cycles Since 1919: A Progress Report,” ibid., May, 1958, 174–5.

8 One of the financial series used as an indicator in this study is the rate of change in the money supply. The analysis presented here suggests that this series (with the exception of 1874) consistently led business cycle turning points throughout the last quarter of the century. These results confirm other findings which have shown the series to be a leading indicator in both the United States and Canada. For the United States see Milton Friedman, “The Supply of Money and Changes in Prices and Output,” U.S. Congress, Joint Economic Committee, The Relationship of Prices to Economic Stability and Growth, Compendium 85th Congress, 2nd Session, 1958, 249; and “The Demand for Money: Some Theoretical and Empirical Results,” Journal of Political Economy, 08, 1959, 327–351.Google Scholar For Canada see George Macesich, “The Rate of Change in Money Stock as a Leading Canadian Indicator,” this Journal, Aug., 1962, 424–30.

9 The technical questions that arise in dating cyclical turning points by the National Bureau method are critically evaluated in the Cloos-Zarnowitz exchange in the Journal of Business as follows: George W. Cloos, “How Good Are the National Bureau's Reference Dates?” Jan., 1963, 14–32; Victor Zarnowitz, “On the Dating of Business Cycles,” April, 1963, 179–99; and George W. Cloos, “More on Reference Dates and Leading Indicators,” July, 1963, 352–64.

10 The quarter-to-quarter rate of change in the money supply fell from 8.5 per cent between the II and III quarters of 1868 to —0.9 per cent between the I and II quarters of 1869; commodity prices fell by 9 per cent between peak and trough.

11 In this instance the peak-to-trough decline in the rate of change in the money supply was from a 9.1 per cent increase between the I and II quarters of 1870 to —4.0 per cent between the II and III quarters of 1871; the commodity price index fell by 9 per cent.

12 The Buckley index shows activity in 1871 to be at a level not exceeded until 1887.

13 The use of financial series in this cyclical experience appears to present a special problem. In commenting upon the state of the Canadian economy during 1874, the Monetary Times points out one important aspect of the 1873 financial crises in New York and the accompanying decline in production and trade that would exert an impact upon the Canadian money supply and the market for chartered bank equities (March 6, 1874, 885, March 27, 1874, 969, and Jan. 8, 1875, 764–7). With the collapse of short-term rates in New York, late in 1873 and early in 1874 large sums were withdrawn by Canadian banks in the winter of 1874, and offered on call in Montreal driving down the short-term rate in that market. This encouraged buying on margin, and gave renewed momentum to Increases in the money supply and to stock market loans in the Canadian market. The index of stock prices reflects this development; between August and December of 1873 rtock prices declined by 4 per cent, but then rose again by 8 per cent through April of 1874. Also the quarter-to-quarter rate of increase in the money supply was especially high between the I and II and the II and III quarters of 1874 as compared with immediately preceding rates of increase. Thus percentage increases are as follows:

14 Taylor, K. W. and Michell, H., Statistical Contributions to Canadian Economic History (Toronto, 1931), II, 22–3.Google Scholar

15 “Canadian Banking System 1817–1898,” Journal of the Canadian Bankers Association, II, 1894–1995, 437.Google Scholar

16 Jan. 8, 1875, 765.

17 Taylor, and Michell, , Statistical Contributions to Canadian Economic History, II, 35.Google Scholar Increased lumber shipments were almost completely offset by reduced shipments of square timber.

18 Monetary Times, Aug. 1, 1873, vol. 7, 104. One Montreal lumber agent compared production and year-end stocks for 1872 and 1873 in the St. Lawrence and Ottawa riva valleys and their tributaries as follows: (figures in millions of board feet)

Data from Monetary Times, Feb. 13, 1874, vol. 7, 799.

19 Monthly data on export values reached a trough in April 1878, after which expanding agricultural and animal shipments more than offset reduced shipments of other merchandise.

20 R. Fels points to a hesitation of similar nature in the counterpart US expansion during the middle of 1880, American Business Cycles, 1865–1897 (Chapel Hill, 1959), 124.Google Scholar

21 Cf. Bank of Nova Scotia, agency circulars, especially Circular 100, Nov. 30, 1882, Circulars 110 and 113, Feb. 5 and April 3, 1883, and the Thomas Fyshe Better Book, March 10, 1883; Monetary Times, June 23, 1882, vol. 15, 1574–5; vol. 16, 67, 403, 823, 1433; Canada, House of Commons Debates, 1883 Session, 332.

22 Kenneth Buckley, “Historical Estimates of Migration and Investment in Canada,” paper given at 1960 Conference on Statistics of the Canadian Political Science Association (mimeographed), 17.

23 Ibid., 15.

24 During the contraction two banks failed: the Bank of London (August), and the Central Bank (November); the Federal Bank went into voluntary liquidation in January of 1888.

25 Cf. the remarks of the general manager of the Bank of Montreal and the general manager of the Canadian Bank of Commerce at the respective banks' annual meetings in June of 1888 as found in the Monetary Times, 06 22, 1888, vol. 21, 1519–1520 and 1578–1580.Google Scholar

26 It is interesting to note the comment of Rendig Fels on the 1888–91 cycle in the United States. “The downswing was singularly mild, qualifying as no more than a recession. Elsewhere in the industrial world the contraction was so long and deep that (except for ohe U.S.) 1890 is generally counted as the peak of a major cycle. As the upturns of 1888 and 1891 were uniquely American, the cycle as a whole bears little resemblance to experience elsewhere.” American Business Cycles 1865–1897, 159. The experience was really North American and not limited to the US.

27 Business failures per 1,000 firms averaged 12 in 1880–82 and 17 in 1885–87, compared with almost 22 in 1889, and just over 22 in both 1890 and 1891. This was slightly above the rate of 20 in 1883 and 1884.

28 The general difficulties suggested above are well summarized in the following contemporary appraisal. “There has seldom been a year in which there was so much diversity; so much of light in one direction and shadow in another; a certain amount of money made in some quarters, and a large amount of money lost in other directions.” Monetary Times, 12 26, 1890, vol. 24, 778.Google Scholar See also the address of the general manager, Merchants' Bank of Canada, 1891, Annual Meeting, June 17, 1891: “The present condition of business in The Dominion is very varied. There is prosperity-great prosperity-in some districts of the country, in some industries, and in some branches of trade; and the reverse in others.” Monetary Times, 06 19, 1891, vol. 24, 1554.Google Scholar

29 Again, it is interesting to note the comment of Fels: “The business cycle that reached a peak in January 1893 and a trough in June 1894 was peculiar to the United States of America. For the rest of the industrial world, the Baring Crisis of 1890 marked the beginning of a protracted decline, which continued until the middle of the nineties.” American Business Cycles, 1865–1897, 179.

30 Taylor, and Michell, , Statistical Contributions to Canadian Economic History, II, 39.Google Scholar

31 In Canada, though there was only one bank failure (the Commercial Bank of Manitoba, a small institution conducting a marginal banking business), it is nevertheless clear that financial conditions in Canada felt the impact of the unsettling financial crises abroad. E. S. Clouston, general manager of the Bank of Montreal, summarized Canadian sensitivity to these monetary developments as follows: “Canada was more fortunate than most countries, but though she escaped without any serious crisis, she had her troubles, and heavy speculative losses were made by the more adventurous of the community… I regret to say that the real danger to Canada last summer was the unsatisfactory condition of the cash reserves of some of the banks. They were weak even for normal periods, but in the delicate and difficult period I refer to, they were a source of danger and peril to Canada. Had the slightest run occurred at this time, I am afraid our much vaunted system would have fared no better than others.” Proceedings of the Annual Meeting of the Bank of Montreal, June 4, 1894, reprinted in Monetary Times, June 8, 1894, vol. 27,1544.

32 See also Monetary Times, April 19, 1895, vol. 28, 1356.

33 Between September 1894 and June 1895 the monthly average quotations in the Toronto market for wheat was as follows:

Figures are from Monetary Times, April 5, 1895, vol. 28, 1294 and Jan. 8, 1897, vol. 30, 911. Between June and December 1895 prices declined by one-third.

34 Forest product shipments after reaching a trough in March, 1895, experienced specific cycle expansion through April, 1897. Depressed conditions in the American market for lumber were more than balanced by the expansion in UK shipments associated with the rising phase of a long cycle in residential construction in the middle and late nineties. Cf. Weber, B., “A New Index of Residential Construction and Long Cycles in House-Building in Great Britain, 1838–1950,” Scottish Journal of Political Economy, 1955, 104–32.Google Scholar

35 “The universal cry that comes up from business circles in all directions, in almost all places, is of continued and most monotonous dullness. This condition of things settled down upon the country months ago and has continued ever since with blighting effects upon trade and industry, until the condition has become almost unbearable.” Monetary Times, 03 26, 1897, vol. 30, 1278.Google Scholar

36 The series used for comparison contain changes in both price and volume. More desirable measures would be series whose movements result from changes in volume only, but monthly price series that permit the necessary deflation are not available. The question then arises whether the presence of diverse secular trends in prices during the subperiod introduces a sufficient degree of bias to cloud interpretation. In the case of imports the Taylor price index ( Statistical Contributions to Canadian Economic History, I, 16–19 Google Scholar) declines by 24 per cent between 1879 and 1897, and rises by 34 per cent between 1897 and 1914. Certainly the first period is characterized by a secular decline, the second by a secular rise in prices. It is impossible to state precisely what the cyclical impact of this price behaviour was in the absence of more detailed analysis of price movements within each cycle. However, it is not unreasonable to assert that the direct statistical effect on the value series of the downward drift of prices in the first subperiod would be to dampen the amplitude of expansions and magnify that of contractions, while with the upward drift during 1897-1914 the opposite effect should be expected.

In the case of aggregate exports there was no secular trend either up or down in the first period but rather expansion from 1879 through 1883, followed by decline through 1886, then renewed increase through 1891, succeeded by a prolonged decline through 1897 (all dates are fiscal years). In contrast there was an unmistakable secular rise of 39 per cent in 1897 to 1910. Export prices weakened slightly in the four years prior to the outbreak of the war.

The Taylor series show the export prices of non-agricultural commodities displaying much greater strength in the 1879–97 period than export prices generally, though after 1897 with the exception of wood products they lack the same upward movement characteristic of export prices generally.