During the period 1921-5 Canada's upswing was generally less intense than those abroad and the consequent sharp rise of merchandise exports relative to imports rendered the current account balance on the whole progressively less passive or more active. During the period 1926-9, on the other hand, Canada's upswing was more intense, for the most part, than those abroad; and the resulting relative rise of merchandise imports made the current account balance progressively less active or more passive. This rise of the current account to a peak in 1925 and its continuous fall thereafter was the dominant characteristic of Canada's international accounts during the upswing, the current account balance being the major independent variable. During the years 1922-5 when Canada was ostensibly on the paper standard all the expected short-run adjusting forces were generally in operation. Similarly the short-run adjusting forces expected under gold standard conditions were found in the main in the 1926-9 period. The major adjusting force in both halves of the upswing was the equilibrating movement of long-term capital, in response mainly to differences in the speed of business expansion at home and abroad. Thus the major disturbing factor in Canada's international accounts, the current account, and the major equilibrating factor, long-term capital movements, seem to have had a common cyclical origin. However, adjustment was incomplete in the first half of the upswing, despite primary and secondary (multiplier-accelerator) income effects and favourable price changes–partly because of the contraction of bank loans and the changes in income distribution.

In a previous paper on the Canadian upswing, 1921-9, it was discovered that the general level of activity in Canada rose only gradually, in the main, from 1921 to 1924 while a sharper rise occurred in the latter half of the upswing. It was also seen that the accelerated rise of both domestic investment and consumption expenditure contributed to the rapid expansion of national income in the latter half of the upswing, the decline in absolute consumption being an important factor explaining the relative lethargy in the first half of the upswing.

This paper is concerned with some of the external factors which may have been partly responsible for the peculiar pattern of the Canadian upswing. For instance, was the slowness of the Canadian recovery in 1923-4 partly due to depressed conditions abroad and a consequent depression of Canadian export industries? As a prerequisite to testing such hypotheses, the relative strengths of the British, American, and Canadian upswings must be determined.

In this paper, the peculiar pattern of the 1921-9 Canadian upswing of activity is examined and its major domestic determinants indicated. In addition, various factors are examined to ascertain their relative significance in determining the size of these domestic determinants. External determinants are not discussed in this paper.

The Canadian upswing from 1921 to 1929, generally speaking, was relatively sharp. By the latter year gross national product had risen 46.9 per cent over the 1921 level; net national income increased 50.4 per cent in the same period. Despite the relatively great strength of the initial expansionary forces, however, the expansion in the years 1923 and 1924 was relatively slow. Gross national product in real terms had risen 16.9 per cent from 1921 to 1922; by 1924 it had only risen 25.9 per cent above the 1921 level. By 1929 gross national product in real terms was 34.8 per cent above the 1924 level. Generally speaking, before 1925 the development proceeded gradually; from 1925 on more violence is evidenced. Hence the problem arises of explaining this peculiar pattern of the Canadian upswing and particularly its failure to continue at its original speedy rate.

Canadian incomes rose at a relatively fast pace in 1922 mainly because of increased investment activity. The theory of the multiplier and acceleration principle would lead us to expect then that as incomes rose from the increased investment, consumption would also rise and thus encourage additional investment in the consumers’ goods sector and those industries equipping this sector.