Download The Post-WWII Canadian Economy

Setting the Scene:
The Post-WWII Canadian Economy
David W. Slater
“Canadian history is a success story
— an account of coping with troubles
and triumphing over adversities.
Although the years since 1945 have
contained their shares of disappointments, they have been more successful than most.”
— Bothwell, Drummond, and
English, Canada Since 1945
T
he history of business economics in
Canada really begins only after the Second World War. Before then, the number of
business economists in Canada could almost
be counted on one hand.1
The Second World War and the reconstruction period that followed gave a great impetus
to the profession of business economics. During the war, economists, although few in
number, played prominent, even decisive
roles in many wartime operations.2 The main
centres of such activity were the small but
powerful staff of the Bank of Canada; the even
smaller but more powerful staff of the Department of Finance; the economic planners and
managers of the Foreign Exchange Control
Board and the Wartime Prices and Trade
Board; the key Munitions and Supply Department, run by its legendary minister, C.D.
Howe; and a small group at the Dominion Bureau of Statistics (as Statistics Canada was
then called).
After the war, the building and use of the national income and expenditure accounts was
an important milestone in the development of
economic research by providing a major
framework for economic planning and policy.
One of the first organizations to use it extensively was the Economics Branch of the Department of Trade and Commerce. The
branch evolved out of the efforts of Dr. W.A.
Mackintosh, originally a Queen’s University
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economics professor (and, later, the university’s principal), who had played a key role in
the Department of Finance during the war.
Mackintosh was given a mandate to establish
a major economic research group for the Department of Reconstruction and Supply under
Howe. In 1947 the department’s name and
function were changed. It became the Department of Trade and Commerce, with Howe as
its minister. He insisted that the Economics
Branch be retained as an important part of the
department.
In addition to the key role it played in developing forecasting within the government, the
Economics Branch also made business/government linkages a much more important activity than they were before the war. This development was facilitated by the fact that
many successful businessmen of the postwar
period had served during the war in Ottawa as
colleagues of members of the Economics
Branch. This business/government interaction was especially important for the development of the many economic and social programs in the postwar years.
The rapid expansion of economics in government served as a model for the private sector.
With the growing complexity of the rapidly
expanding postwar economy, interest in what
economics could do for business firms mushroomed. The magnitude of that development
is illustrated by the relative growth of the business economics profession. While Canada’s
real gross domestic product (GDP) in 1993
was about seven times greater than in 1946,
the number of economists in government and
the private sector grew much more rapidly
during that period. According to my memory
of the early postwar years, there were then no
more than 100 economists at work, with only
a handful in the private sector. By 1993, it is
estimated that there were almost 4,500 active
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Winter/Spring 1997
applied economists, with about 3,500 in government and 1,000 in the private sector
(Hoicka, 1995).
It would be an exaggeration to credit economists with the country’s postwar economic
success, but there is no doubt that they did
contribute effectively and importantly to the
rational analysis and common-sense policy
developments of firms, industries, and the
economy as a whole. In addition, they played
a key bridging role between business and government in the complex mixed economy of
the postwar years. They also served an educational purpose by providing advice and assistance to the judiciary and the regulators who
needed to become economically literate.
Four Features of
Postwar Canadian
Economic History
In one of the best recent economic histories
of Canada, Norrie and Owram (1991) have set
out four features of the postwar years:
The first ... is ... significant growth
and structural change. Today’s economy, when compared to that of 1945,
is larger, richer, and much altered.
Technology has made it possible to
produce ever-greater quantities of
grain, lumber, ore, steel and automobiles with less labour. Instead, workers have found employment as retail
clerks, data-processors, teachers,
nurses, and research scientists. These
new jobs are mostly in cities and, relative to the past, are increasingly taken
by women and by visible minorities....
Second ... even in the midst of this
structural change, much in the economy is unchanged. We remain a small,
open society, be it with respect to international commerce or to ideas and
ideologies....
Third ... in terms of overall macro-economic performance, the years between 1945 and the early 1980s divide
naturally into two distinct periods.
The first ran from the end of the war to
the early 1970s and the dominant
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characteristics were growth and prosperity. An initial period of uncertainty
as postwar reconstruction was underway was followed by more than 20
years of sustained, albeit uneven, economic expansion.... Performance alt e r e d d r a m at i c a l l y af t e r 1 9 7 3 .
Economic growth fell off sharply, inflation and unemployment rates rose,
and government deficits soared. Was
the “golden era” of Canadian economic performance during the first
three postwar decades the norm and
the subsequent two decades an aberration — or the reverse?
The fourth point is that the turnaround in economic performance in
the 1970s was accompanied by a distinct shift in attitudes to economic
management. Mu ch ha d be en expected of government in 1946. The
success in restructuring the economy
to meet wartime needs seemed to indicate that it could be similarly engineered to meet peacetime challenges.
New Keynesian [policy approaches]
promised to even out business fluctuations. Ambitious programs for
health, education and income-security were planned to ensure that some
of the fruits of the growth and prosperity flowed to the less fortunate in
society.... The economic difficulties
after 1973 seriously challenged this
faith in economic management.
Themes Underlying
Canada’s Postwar
Economic Growth
Consider first the “golden era” of Canada’s
postwar growth — the period between 1945
and the early 1970s. The standard explanations for the strong growth in that period have
been built on three elements. One follows the
Innis-Mackintosh thesis about Canadian
growth being founded on export staples,
which, with minerals and energy, continued
to be important after the war. The second element was the stimulatory effect of government and government-assisted megaprojects,
such as the Trans-Canada Highway, the St.
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Lawrence Seaway, the Quebec North Shore
and Labrador Railroad, and the oil and gas
pipelines. The third was a large inflow of foreign
savings into direct investments in Canada.
Related to these developments was an intensification of the Americanization of the Canadian economy, brought on partly by capital inflows. As well, despite major efforts at the end
of the war to recapture and expand Canadian
markets in Europe, trade with the United
States became dominant. Canadian tastes and
economic institutions became more American. Indeed, even by 1947 it had become clear
that in the face of exchange controls and trade
barriers in Europe and other overseas markets, Canada was being forced to strengthen
its economic relationships with its big southern neighbour. Fortunately, U.S. growth performance was extraordinarily strong during
the postwar era.
In addition to the above explanation, two
factors contributed to Canada’s strong postwar economic performance. First, Canada
and the United States were the only two of the
world’s major industrial economies whose infrastructures significantly expanded during
the war and were not devastated by it. Second, there were strong indigenous forces behind Canadian postwar growth, many of
them rooted in Canada’s wartime experience
or in its private as well as public efforts at
postwar reconstruction and development.
The domestic economy was not just an adjunct of the export, megaproject, and foreign
investment activities. Domestic forces of economic development were important in their
own right.
Domestic Economic
Growth
The Canadian economy changed fundamentally between the beginning and the end of the
war. It became more productive and more diversified, and it had a more confident, skilled
labour force, as well as a set of institutions
that were more conducive to sustained domestic growth. During the war, real output per
worker increased by one-third, and total real
output by two-thirds; in other words, productivity had increased at a compound rate of
nearly 5 per cent per annum and output by 10
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per cent. Product specialization and the development of new industries were both important elements of wartime economic performance. Canada produced huge quantities
of a limited number of goods, thus gaining
large economies of scale. Canada also introduced, or expanded from small beginnings,
such industries as aluminium smelting and
fabrication, and the production of synthetic
rubber, synthetic fibres, ball bearings, antibiotics, high-octane gasoline, aircraft frames,
electronics, and optical glass. In addition, Canadian steel and truck production expanded
greatly.
Furthermore, Canada’s productivity levels
did not fall off significantly at the end of the
war. Indeed, after a pause productivity continued to grow at rates that were high for a
peacetime economy, well above their longterm average. Annual growth rates in real output per employed person exceeded 3 per cent.
This development was somewhat surprising
in view of two potential drags on the postwar
economy. The first was the burden of a huge
postwar redeployment of the labour force: at
the end of the war Canada had three quarters
of a million people in war industries and a
similar number in the armed forces, out of a
total labour force of just over 5 million. The
other potential drag was the continuation of
the high trade barriers of the 1930s; it was well
into the postwar period before these barriers
began to come down. For these reasons, many
expected the Canadian economy to return to
the more diverse, small-scale production patterns that had characterized the interwar period. As it turned out, however, these factors
were offset by positive influences.
The surprisingly strong postwar productivity
performance reflected several factors. Both
the military and war production efforts during
the war improved the skills of the labour
force. Large contributions were also made by
the educational programs for veterans after
the war. Immigration increased, bringing relatively highly skilled workers into the Canadian labour force. For the first time in the
country’s history, there was a fully developed,
internal migration network.3 Canada also
shared in the cumulation of under-applied
technical knowledge inherited from the interwar and war periods. More importantly, it
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Winter/Spring 1997
was in a better position than most countries to
take advantage of these opportunities.
Increased productivity was particularly evident in the agriculture industry. The postwar
mechanization of Canadian agriculture was
part of the reason for an astounding increase
in output per agricultural worker and a rapid
decline in the farm and rural population. At
the end of the war, the employed agricultural
labour force was over 1.1 million persons, or
more than 20 per cent of the country’s labour
force. By 1961 that number had been cut almost in half. In 1945, fewer than a quarter of
the farms in Canada had tractors; by 1961 over
80 per cent had at least one. The transition
from power furnished by horses to internal
combustion engines took place rapidly. Canada had nearly 2.5 million horses at the end of
the war, but only half a million in 1961. Other
factors contributing to the large increase in agricultural productivity were the increased size
and scale of farms; the use of insecticides,
pesticides, and fertilizers; and improved
transportation and access to external markets.
Increased productivity also came from developments in the transportation, housing,
and capital-investment sectors. The automobile (and truck) became the dominant mode
of transport, except for heavy, low-valued
bulk goods. Between 1941 and 1951 automobile ownership increased only marginally;
36.7 per cent of Canadian households reported owning one in 1941 compared with 43
per cent in 1951. But by 1961 the automobile
boom was on in earnest; 68.4 per cent of Canadian homes boasted at least one car (Bothwell, Drummond, and English, 1989:142).
Automobile registration was about 1.4 million
in 1946, but by 1966 it was 7 million.
The country’s road systems, both urban and
highway, also expanded rapidly in the postwar period. At the end of the war only 17,300
miles of the improved roads were paved;
144,000 miles were gravel or crushed stone,
and 420,000 miles were simply earth. Between 1945 and 1960, four times as much
building of paved roads took place as had occurred between 1929 and the beginning of the
war. By 1975, 149,400 miles of roads were
paved, 255,200 were gravel or crushed stone,
and only 107,000 were earth (Urquhart and
Buckley, 1965).
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One of the greatest scarcities at the end of the
war was housing. In fact, the nation’s housing
stock was lower in 1945 than it had been in
1929. In the first 15 years following the war,
1.6 million new housing units were built — an
increase of roughly 50 per cent in the total
housing stock. Moreover, most of the new
housing met the minimum standards of the
National Building Code. Even with this effort,
however, Canada’s per capita stock of housing did not surpass prewar levels until well
into the late 1960s.
Capital investment from domestic sources
was also an important factor in postwar economic growth (Urquhart, 1988). While there
were significant net foreign capital inflows in
the mid-to-late 1950s and the late 1970s, the
dependence on such inflows for the high
amount of investment activity that occurred
in Canada in those years was much less than
during other periods of high investment. To
put the matter differently, the bulk of postwar
investment was financed by Canadian domestic saving. (Net capital inflows, however,
became a much larger factor in the 1980s and
1990s.)
To sum up, while resource-based export staples continued to make favourable, though
uneven, contributions to Canada’s growth
throughout the early postwar period, domestic indigenous contributions were proportionately larger than they had been during the first
half of the 20th century. The details of the domestic developments are easy to identify, but
what were the fundamental forces and policies at play?
What Forces and
Conditions Led to
the Postwar Burst of
Indigenous Canadian
Growth?
The answer to this question is somewhat
speculative because the forces at work involved confidence, attitudes, objective conditions, programs, and policies. Some personal
speculations follow:
• The strength and diversity of Canada’s industrial contributions to the war effort, as
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•
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•
•
•
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noted earlier, provided momentum for
solid postwar performance. The new industries that had been developed and the
new plant in older industries were useful
and profitable in the postwar period, with
few exceptions.
Canadians gained confidence in introducing new technology in production. This
was particularly noticeable in agriculture.
The National Research Council, which
had been such an important factor in wartime technological advances, continued to
make similar contributions after the war.
Innovation — i.e. the introduction of
available technologies (foreign as well as
domestic) into production processes and
marketing — increased significantly.
Much richer and more effective networks
of suppliers and subcontractors had been
built up during the war than existed previously, and these continued to be used after 1945.
As noted earlier, the wartime links between business and government were
continued under Howe’s postwar Reconstruction and Supply, and then Trade and
Commerce, departments. Close relationships also continued between business
and the Department of Finance and the
Bank of Canada.
A generation of Canadian engineers and
managers had gained experience and confidence from their wartime activities,
which they carried into their postwar civilian roles.
Having used industrial incentives, subsidies, and support for infrastructure effectively in the wartime Munitions and
Supply programs, the federal government
continued to provide help for business after the war. Indeed, in the postwar reform
of the corporation income tax, Canada
built in much more generous depreciation
allowances than existed in the United
States (Perry, 1969).
Perceived gaps in Canadian capital markets were filled, at the end of the war, by
•
•
•
•
•
the establishment of the Industrial Development Bank, the farm improvement loan
programs, and, late in the period, the Export Development Corporation.
The revamped and enlarged Central Mortgage and Housing Corporation (CMHC)
and its extremely effective participation in
mortgage lending and insurance were of
immense importance to the postwar Canadian housing program. The National
Housing Act was a major contributor not
only in improving housing standards, but
also in promoting effective town planning
and the provision and financing of urban
infrastructure.
The release of the refundable portions of
wartime income taxation was obviously
important. The maintenance of the low
wartime interest rates facilitated the gradual liquidation of the public’s accumulation of war bonds and aided in the funding
of postwar business and personal investment.
The successful management of the massive wartime fiscal, monetary, and debt
programs provided both to the government and the public considerable confidence that Canada could attain a high and
stable level of employment and income.
This confidence was reinforced by the
White Paper on Employment and Income
(1945) and by other postwar plans for reconstruction.
Canada systematically pursued a more
open and stable multilateral system of international trade and finance, through the
International Monetary Fund, the World
Bank, and the General Agreement on Tariffs and Trade (GATT).
And last, but far from least, was the important contribution made by the rapidly
expanding numbers of economists employed in government and industry.
To sum up, a conjuncture of circumstances,
attitudes, programs, and policies gave a
strong thrust to Canada’s successful postwar
economic growth.
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Winter/Spring 1997
Inflation and
Disinflation, Slow
Growth and High
Unemployment
Now we turn to the years after the “golden
era.” While those years included some years
of good economic performance, the overall
story has been disappointing in many respects. Inflation rose to double-digit rates in
the mid-1970s, resulting in serious trouble for
the economy; price and wage controls were
imposed for a time; massive monetary restraint was instituted in the early 1980s; productivity and real income growth, fell to historically low levels; unemployment rates
grew in each successive business cycle; financial instability increased significantly with the
failure of a number of financial institutions;
and governments were overwhelmed by
growing deficits and debts, thereby weakening the use of active fiscal policy.
Why Have the Last
20 Years Been so
Different?
Despite hundreds of articles and many
books examining this question, the jury is still
out on the question of why the last 20 years
have been so different. The stylized facts,
summarized below, are generally acknowledged, but they are not the fundamental explanations.
• First, inflation, which increasingly affected the G-7 countries, became relatively severe in Canada during the
mid-1970s. In a leap-frog sequence, both
business and labour expected to be bailed
out of accelerating costs by inflation.
Household, business, and government
debtors all expected to be rescued from
their inflationary actions by more inflation. Central banks, grossly underestimating the expanding liquidity arising from
institutional changes in financial systems
in Canada and the other G-7 countries,
made the wrong moves to counter the
large oil price increases of the mid-1970s.
Inflation accounting proposals did not
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take hold, either in the practices of individual companies or in public policies.
Valuations of earnings and capital were
thus exaggerated by accelerating inflation
expectations. In all, it is very clear now
that when inflation works its way into
every nook and cranny of an economy, it
will take a long time and great pain to
eradicate it.
• Second, the golden-era pace of economic
growth was incorrectly expected to continue to be the norm. In Canada, the staple
industries were expected to provide additional growth and large and increasing
economic rents. Megaprojects would provide the basis for future growth, mainly in
the resource-based industries. Housing
starts, office space, and shopping malls
were expected to continue to expand, justified by optimistic growth expectations of
Canadian households and businesses.
The Canadian financial system believed
these expectations and financed the property booms. Unfortunately, many of those
expectations were not justified since golden-era economic growth was sui generis,
with the average performance of the last
20 years nearer the norm. In many cases,
this resulted in heavy job and financial
losses.
• Third, while no new major social programs have been adopted since the mid1970s, the costs of those already in place
have increased more rapidly than GDP.
Health care, education, welfare programs,
unemployment insurance, and the reduction of regional disparities have all become relatively more costly. The burden
on taxpayers increased significantly, but
even with steep tax increases, the federal
government ran a deficit in every year after 1974 — in fact, a very large deficit in
each year of the past decade and a half.
The debt burden eventually became so
large that cutbacks, with the resulting fiscal drag, became a feature of policy. Program reductions were the norm, and
activist fiscal policies became impossible.
Even program initiatives or improvements
with public support had to be delayed or
scrapped. The highway system and the urban infrastructure, for example are deteriorating because of lack of funds.
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• Fourth, real rates of interest after 1980
have become high by historical standards
throughout the world, partly reflecting the
trend towards large government deficits.
In addition, in Canada the comparatively
more rapid growth in government deficits
and the increased political uncertainty associated with the possible separation of
Quebec led to a widening of Canada/international interest rate differentials. This
has meant that for new investments, the
hurdle rates for favourable decisions have
increased. For governments, with their
large deficits and debts, high interest rates
have added to the real burden of debt service.
No consensus has yet emerged on Canada’s
prospects after the painful shake-out that is
now under way is completed. Many question
marks remain. Among other things, the benefits of the revolution in information technology have yet to be fully realized. The dramatic
increase in productivity and jobs from the
free-trade agreements have been difficult to
document. The years of cost-cutting in business have so far yielded limited gains in productivity and profitability. The barriers to interprovincial trade have turned out to be
persistent. Government efforts to reduce deficits and the debt burden will be with us for
some time yet, with the resulting drag on
growth. If our heavy dependence on foreign
capital inflows continues, we will require
higher real interest rates than those in other
major industrial countries.
How, then, can prospective performance be
improved? Will low-inflation monetary policy
deliver on its promise of increasing real
growth? Will governments be successful in reducing their deficits and thereby lessening the
fiscal drag that has been plaguing the economy? Will real interest rates fall below real
growth rates so that the reduction of governmental deficits and debt-to-GDP ratios will
become easier? Can unemployment be substantially reduced? And how can the incipient
crises of income and health care for the en-
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larging proportion of the aged population be
met?
In coming years, economists in both government and business will be called upon to provide analysis and advice to assist in the favourable resolution of these issues or,
alternatively, to anticipate potential problems
facing organizations as a result of their nonresolution. Clearly, these dilemmas will provide a huge challenge for the profession.
Some Concluding
Thoughts
The postwar golden era of the Canadian
economy was also a golden era in the development and influence of business economists. The last two decades, on the other
hand, have been tougher sledding for both. To
their credit, business economists were early
and persistent critics of policies that were
leading to trouble, most notably mounting
government deficits. To a great extent, however, their warnings fell on deaf ears. Ironically, they were caught up, to some extent, in
the rounds of cost-cutting and restructuring
that have resulted.
For much of the postwar period, academic
economics and business economics grew
apart. But more recently, renewed or new
work has begun to bridge the gap. The work
on economic growth by Richard Lipsey, Paul
Romer, and others is based more on the historical record of the real world than on neoclassical growth theory. Long-cycle analysis
has had a regeneration. The Lucas expectational models provide a powerful framework
for dynamic micro and macro analysis of
events, policy, and performance. The rich
data bases developed by Statistics Canada
and the power of electronic computing have
enormously expanded the capacity for analysis. Business economists, therefore, have new
ideas and new tools to improve their usefulness. With the formidable challenges that lie
ahead, these should help them regain some of
the momentum they experienced during the
golden era.
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Winter/Spring 1997
Notes
References
1.
Douglas Gibson and Gilbert Jackson made a name
for themselves at the Bank of Nova Scotia in the
1930s. Before that, in the 1920s, a Canadian, W. Clifford Clark, had become a successful business economist in the United States, where he was the
vice-president and chief economist of a major mortgage banking firm. After returning to Canada he became one of this country’s greatest deputy ministers
of Finance, serving between 1932 and his death in
1952. But the first business economist to work in
Canada was Graham Towers. He began his career in
economics with the Royal Bank in 1920. Then, in
1934, he became the very successful founding Governor of the Bank of Canada.
2.
For a detailed discussion of the role of economists
in Ottawa during WWII, see Slater (1995).
3.
Mobility was increased by the experience of the massive movements of armed forces and munitions
workers during the war; by the establishment of the
National Employment Service; by improvements in
transportation and communications; and by increased accessibility of postsecondary education.
Bothwell, Robert, Ian Drummond, and John
English (1989) Canada Since 1945, revised edition (Toronto: University of
Toronto Press).
Harvey Perry, J. (1969) Taxation in Canada,
third edition (Toronto: University of
Toronto Press).
Hoicka, John (1995) “Restructuring the Economics Profession: From Specialist to
Generalist,” Canadian Business Economics, Vol. 3, No. 2, Winter, pp. 63-74.
Norrie, Kenneth and Douglas Owram, (1991)
A History of the Canadian Economy
(Toronto: Harcourt Brace Jovanovich.
Urquhart, M.C. (1988) “Canadian Economic
Growth 1870-1980,” Discussion Paper
No. 734, Queen’s University, Department
of Economics, November.
Urquhart, M.C. and Buckley, (1965) Historical Statistics of Canada (Toronto: Cambridge University Press).
Slater, David W. (1995) War Finance and Reconstruction: The Role of Canada’s Department of Finance, 1939-46.
Winter/Spring 1997
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