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The Montréal Review, February 2009


"Worst is over now, future is glorious, Bennett confident. Greatest prosperity ever known lies ahead, says Premier."

  On the first page of Globe and Mail on January 2, 1932


Late afternoon on Thursday, September 18, 2008, Federal Reserve Chairman Ben Bernanke and United States Treasury Secretary Henry Paulson had an emergency private meeting with the leaders of American Congress of both parties. The congressmen had no idea what they were going to hear. Paulson told the congressmen that unless they act the financial system of the U.S. and the world will meltdown in a matter of days. "If we don't do this tomorrow we will not have economy on Monday," Bernanke added. "There was literally a pause in that room where the oxygen left," Chris Dodd, the chairman of Senate Banking Committee, recalled later for an interview for the PBS. (1)

It is difficult to explain how exactly America had reached this point, but the fact is clear -- in 2008 its banking system began to disintegrate and this dragged down not only her economy, but the entire world. To prevent an absolute collapse, the American government launched the biggest state intervention in economy since the Great Depression.

Something similar happened in the end of 1929 and beginning of the 1930s. Before the First World War the American stock market was small and relatively unimportant part in the general development of economy. The change in its importance began during and after the war. During the war, the American government started to sell "victory bonds" to ordinary people, making stock trade more popular and comprehensible. The trade with bonds increased to trade with stocks which seemed profitable not only for the traditional stock brokers, but for the newcomers as well. Only 3 percent of Americans owned securities, but the amount of money invested in them was enormous. (2) In the 1920s, the price of stocks was risisng steadily and this created among investors, borrowers and lenders irrational optimism in the future of stock market. The decade was an era of an ever expanding "bull market." To buy more stocks the brokers borrowed money from banks that, certain of their returns, were happy to lend (known as "buying on the margin"). On October 29, 1929 , Wall Street exploded. The price of stocks collapsed. In a single morning billions of dollars evaporated. The bubble of unrestrained, frenzy investing in unreal value busted. The event triggered an economic breakdown.

The collapse of Wall Street hit both the American and European banking systems. In 1931, two years after the October crash, the financial crisis devastated the bank systems of Austria, Poland, Hungary, Czechoslovakia, Romania, Germany, Switzerland, France, the United Kingdom, Turkey, Mexico, Egypt, and the United States. By the end of 1933, half of the American financial institutions that existed in 1929 were gone. The bankruptcies destroyed business confidence, and the flow of capital decreased drastically. Companies fell off their production and started to lay off workers. Investors stopped lending money to borrowers. The ordinary people drew out their money from the banks because at the time the government did not guarantee the savings. Consumer spending decreased sharply and the economic crisis turned from recession into depression.

There is no technical definition for depression. Yet it can be explained as a situation when an economy experiences long-lasting downturn, decreasing Global National Product (GNP), deflation, high unemployment, and production slowdown in a great number of economic sectors. (It should be noted that the lack of clear definition has permitted some commentators and polititians to call the recent economic crisis "The Great Recession", while others, like Richard Posner, described it simply as "Depression". (See R. Posner, "The Crisis of Capitalist Democracy", The Montreal Review, September, 2011)

Following the conventional philosophy of the time, Hoover's administration did not believe that the government is capable of influencing economic cycles. The American President took some measures against the crisis -- the government started buying "toxic assets" (mainly with the help of private investors such as Rockefeller) (3) for restoring stock market confidence, created the Reconstruction Finance Corporation and Federal Farm Board, etc. -- but the results were disappointing. Hoover's successor, F.D. Roosevelt, began a much more aggressive policy of state intervention, starting a number of public projects, following the new minted, but not tested Keynesian theory, yet the reconstruction continued to lag in the whole decade of the 1930s. The downturn in the United States reflected everywhere, perhaps most severely in Canada.

In the 1920s -- 1930s, Canada was small and dependant economy. For years it produced raw materials, manufacture and agriculture goods for export to Britain and United States. The success of Canada's economy depended to a great extent on the global demand for raw materials and on the freedom of world market. Foreign markets and the exploitation of natural recourses were the motors behind its economic development. The changes in trade tariffs and in the global demand for resources reflected immediately in Canada--although big, the American North was sparsely populated, its domestic market was too small to compensate slump in export.

In the 1920s, the winning industries in Canada were mining, newsprint, hydro-electricity, and aluminum production. The traditional industries - railways, iron and steel production, coal and agriculture - were not strong, and some old sectors were even in stagnation either because of overproduction or global competition. Manufacturing was developing slowly, except for the automobile industry which was in the hands of American investors and companies. As of 1930s, one fifth of the "book value" of Canadian industry and more than two fifths of mining, smelting and petroleum was controlled by American companies. 4 American capital was flowing in Canada under the welcoming watch of Canadian politicians. After a few difficult years at the beginning of 1920s, Canada experienced strong growth fueled mainly by the power of American economy. But dependence, as everybody knows, is never good and it does not matter whether it gives you richness or security. American economy turned to be the honey and the sting for Canada. The unlimited optimism of Americans infected the Canadians, the fever of excessive investments and false reliance on future profits blinded Canadian and American politicians and businessmen alike. And when the crash of America came, it was hard for Canada to believe that the good time for her had finished as well.


There is no better way to feel the spirit of this time than reading old newspapers. It is January 1, 1929. Under big, black letters: "Billion in dividends to be distributed during this week," The Globe announces that the Canadian industry is prosperous. Millions of dollars from dividends and interest from Wall Street will be distributed to shareholders in the first week of the year. This is the largest distribution of money from investments in the U.S. history, the newspaper notes. The Globe explains the "extraordinary" prosperity of business with the record rates of industrial production and the expansion of corporate business in 1928. 5

At this time, it seems that the prosperity swamps the entire continent, from north to south, from coast to coast. In the same New Year's copy, under the title "Coast's industry ends the greatest year," the Globe writes that 1928 is the "greatest" year for the economy of British Columbia, the Province's four leading industries "for the first time broke" quarter-billion marks. 6 On the editorial page, one can find the following words: "No man can read the future. As far as human eye can see, the outlook for the year 1929 is bright. Yet it is only necessary to turn back to January 1, 1914 , to read the messages of flamboyant optimism penned for that date, to realize the necessity for caution in propensity. But this much is certain: it would be a happier, more prosperous year if it were everywhere agreed that in this year 1929 men and nations should get just what they deserve." 7

How prophetic the ending words of editor's last sentence turned to be! And how wrong! In that same year, 1929, the nations started to get "just what they deserve". The first great sign of their doom happened on October 29th, 1929. Yet the event had not met due attention by Canadian politicians and even businessmen. It was called "The Black Tuesday," the crash of stock market in New York. The next day, October 30th, along with the passions of the day - the drinking habits of the working class and the Ontario elections - the Globe reports: "Strenuous efforts of great banks turn stampede of frantic sellers during record day on Wall Street." 8 The Globe writes about decline in shares that varies from 10% to 70%. The comments are about a speculative frenzy. Right beside the news of Wall Street's earthquakes, the Globe reports that the Canadian and American bankers express confidence in the general business situation. The mindset behind the expressed "confidence" is not clear - if they want to calm down the markets or just they have lack of understanding. The comments of Prime Minister Mackenzie King are not different. In an interview with William Marchington, staff correspondent of the Globe, King says that the economic conditions in Canada were never better and the faith in future is more than justified. 9

In its editorial the Globe says: "As they [stock traders] apparently thought a few weeks ago that there is no top, they seemed to conclude, in the downward rush, there was no bottom." The Globe carefully reassures the reader that the losses of millions of dollars are in the United States , yet this loss possibly may affect the Canadian business. The newspaper quotes M. W. Wilson, general manager of the Royal Bank, who says that it would be a mistake to think that the "sharp decline in stock market quotations in Canada" correspond to overall conditions of Canadian economy. "These conditions, says Wilson , are sound and there is no reason for pessimism." 10 The next day Globe informs readers about the wise actions of America 's most powerful financial powers, headed by J.P. Morgan and Rockefeller, who had intervened with capital in Wall Street. 11 As history later showed, their efforts were in vain. A sickness that started years ago could not be cured for a day with medicine that does not work.

The American economy was not shaken by Wall Street; rather Wall Street was shaken by the structural distortions of the American and world economy. The distortions were not only in economy, they were in the post-war social and political environment. After the Great War, during the 1920s and the beginning of 1930s, the world was in chaos--the peace did not bring true prosperity and armistice.

Yet, the Americans and Canadians did not realize this well. Far from Europe that for a decade had been tormented by unemployment, political conflicts, inflation and recession America and Canada, in the end of 1929, were still confident in their well-being and future. At least on the pages of Globe, there were no news for worsening economic conditions. It is difficult for a reader to discover in the newspaper a pessimist thought. Most of the news about economy were dry, unemotional, mere reporting. On the editorial pages there were no opinions discussing economic topics, neither from the editors, nor from the readers.

In the beginning of 1930 the reports for Canada's export were still optimistic. Under a title "Canada's total trade with other countries shows steady rise" R. J. Hutchins, a president of Canadian Manufacturers' Association, explains that between 1927 and 1929 the Canadian foreign trade is expanding, despite the fact that statistical data shows negative trade balance in 1929. R. J. Hutchins writes that after the war the countries of the world raised their tariffs in order to protect their workers and industries. He says that in addition to the raising of tariffs the countries purposefully create sophisticated requirements for foreign goods entering their ports. Hutchins says that when nearly all countries in the world are protecting their own industries, it seems reasonable for Canada to maintain "proper safeguards" for its workers as well. 12 Certainly the Liberal Prime Minister Mackenzie King was in agreement with such an opinion, as well as his successor R.B. Bennett. 13 Hutchins's words express the orthodoxy of the day.

The annual financial survey for 1929 is also positive, with bolder letters the Globe announces that " Canada 's business volume made record in 1929," and continues that the business prospects for 1930 look "excellent" if Canadian people remain steady. 14 Indeed in 1929 the international trade system was showing serious flaws; it was rapidly disintegrating, losing weight from a number of sources - mounting protectionism, inappropriate economic practices (continuing unsuccessful attempts for reestablishing the gold standard and fixed exchange rates), heavy and strenuous reparations for defeated in the war nations, continuing changes in industry and production's structure, overproduction of wheat, steal and other primary commodities. At the end of 1929 Canadians did not realize that the success of their country depends not only on their own work and efforts, but also on the performance of other nations. The world in general did not realize how interdependent the economic system is.

The Great War ended, but the world entered into another global conflict -- this time economic one. After 1874 Britain was the biggest lender and consumer, her investments were spread around the world. The empire kept the flow of capital alive and trade barriers low. Until 1913 the British market was relatively open to many "distress goods,"15 which helped the economies in trouble or in a process of development to adjust to global demand without serious troubles. From the second half of nineteenth century until 1913, the openness of the markets kept the world relatively stable. In the 1920s, Britain 's international role and importance diminished. When the Depression hit the world economy the only economic power that could save it was the United States, but Washington did not act as London acted before. The Americans did not open their market for overproduced goods, nor did they want to lend money abroad. In the twenties every country blindly protected its national private interest sacrificing the world public interest and with it the private interests of all. The "wisdom of protectionism" had become even more widespread after 1929 when the international capital melted (or was frozen) and the national industries suffered their most severe decline in decades. 16

The protectionist actions and psyche were accompanied with boisterous nationalism and selfishness. The Globe's pages from the beginning of 1930 are remarkable for their triumphant optimism and belief in self-sustainability. The Canadians had had the full right to be proud of their nation's success since in twenties the economic growth of their country was among the fastest in the world. But it is disturbing the evidence of the short-sighteness of Canadian business leaders and politicians for the bumpy road ahead. The ruling elites did not want to believe that October's truce in Wall Street, the volatility of commodity prices and decrease of foreign trade, predicts hard times.

Finally, at the end of 1930, there were signs of sobering. The Globe starts its Christmas editorial with the words: "Despite depression and a world of confusion, the spirit of Christmas still prevails." The leading theme on the editorial page, the day before Christmas, is the debate over proposed changes in taxes. Readers were writing to the Globe giving their opinions about the creation of a single land tax and the proposals for the implementation of a gas tax. On the same date, the Globe also publishes a letter from a reader, Charles Waddle from Toronto , who is opposing to the writings of a journalist who had argued in an article, days earlier, that the standard of living depends not on the wages, but on the quantity of produced goods in the country. Waddle was indignant at this opinion. He called it wrong and expressed his embarrassment about the creation of a "money aristocracy" in Canada that suppresses not only the poor, but the country's development. "Large numbers of the community did not have the opportunity to command wages on a high scale" - writes Waddle - "It is they, the poor, who have suffered and suffering of the greed of the more fortunate. The aggregation of wealth in few hands is not civilization; it is a form of base tyranny through abuse of money. Gambling through greed on the stock market when the capital is cheap is damaging to honest business. Artificial prices for labor or commodities cannot be sustained at the present market, but it is unfair that the worker should mark down his standard first. What about the capitalist who holds up rents and the professional and governing classes who have not yet sufficiently met the need for lower costs to keep sales on markets? John Ruskin declared, 'Indeed to do the best for others is finally to do the best for ourselves.'" 17

These words were true. The Great Depression was caused by many "technical" factors (the existence of asymmetries in world economy, flaws in the system of gold standard, international deflation etc.), but in its foundation was the reluctance of big business and the government to understand that wealth should be more fairly distributed among people and nations. The distribution was possible only through new regulations over economic activity and the encouragement of free trade. New rules corresponding to the realities of domestic and world economy, new ways of production and business practices, new wages and security in case of unemployment - these were the ingredients for prosperity and progress.

Yet Charles Waddle's voice was not an exception. There were politicians, union and even business leaders who believed that the economic system needs nontraditional measures to boost the cooperation and mutual benefit of workers, employers and states. For example, in his Christmas message, published by the Globe in 1929, Tom Moore, the president of the Trades and Labor Congress of Canada, says that through preparing for depression in times of prosperity, and nation-wide unemployment insurance, the worst features of hard can be eliminated in future. 18 He was right, but the system of unemployment insurance was not implemented not until the Second World War (Unemployment Insurance Act, 1941). The stubborn reluctance of Canadian Liberals and Conservatives to deal with the evils of unemployment was remarkable.

At the beginning of the 1930s, the sober voices of realism appealing for action had not created a new policy. Month after month, in a "domino effect," nations succumbed under the fear of economic Armageddon and chose to close their markets, believing that only protectionist policy can save their economies. Most of these actions were a defense against the American "super-protectionism." In December 24, 1931 , Globe announces under a miniature title "To increase tariff" that Belgium decides to increase its tariffs and to regulate its imports as a defensive measures against the protectionist regulations of other countries. This was ordinary news.

The protectionist policy was not without opposition. In Canada there was a nearly silent agreement between liberals and conservatives that protectionism is healthy for the domestic economy, but in the United States there were strong voices against it. 19 The American Senator Cordell Hull (who received the Nobel Peace Prize in 1945) called the constant tariff increases a "wild orgy" and "virtual state of economic war", and saw the effects of American protectionism as "demoralizing" the world. "It is astonishing - says the Senator - that the world trade for 1931, adjusted to 1913 prices, would be below the level of 1913, eighteen years ago." 20

Although today's world is very different from the world of early 1930s the old issues seem familiar. For example, a month ago, in January 2009, Canada and Europe were shaken by fear that the new American administration will provoke a "trade war" with a "Buy American" clause in the proposed U.S. economic stimulus package. 21 Nowadays the banks, especially in the United States , have tightened the credit so much that influential economists such as the Nobel Prize Laureate Joseph Stiglitz warned that while the banks use public money for their own survival, they are holding up the capital for investments. The actions of "practically bankrupted", but sponsored with public money banks, are hurting business activity and pushing unemployment up, argued Stiglitz in a number of interviews and economic forums. In December 1931 an anonymous the reader of Globe, calling himself "Problem solver", has almost the same arguments as Stiglitz. He writes the following letter to the editor: "We constantly hear of depression, stagnation and slackness of business, hard times, reduced pay envelopes, cuts in wages and etc. and at the same time we read of the exceptionally large cash deposits lying in our banks. These sums accumulating and unemployed through lack of confidence, would if allowed to circulate actively in business, go a long way toward solving our unemployment and others problems of today." 22

The mood of the nation on eve of 1932 is gloomy. The editorial pages of the Globe show uncertainty and weakened spirit even in texts under titles such as "1932: A year of Hope." ( December 31, 1931 ) In the same article the journalist writes: "Men are looking backward and forward. The past twelve months have been discouraging. What will the new year bring? The ablest men in all countries have been striving to find a solution for the world's difficulties, and have been baffled." 23 The word "depression" is mentioned in nearly every copy in the last months of 1931. The debate on the economic problems involves not only the "ablest men" from all countries, as the journalist writes, but also the ordinary Canadians. Their letters to the Globe range from suggestions to the Prime Minister to put a 100 percent tax on currency exchange transactions (because of the weakness of Canadian dollar against the American currency) 24 to criticism, such as the letter of E. G. Barlett who describes all unsuccessful theories and remedies as expressions of human "childishness" and "selfishness" - "the only sources creating the social and economic crisis." "In a world of superabundance of everything" - writes Barlett - "the present situation shows the ridiculousness of our pretensions of being civilized, either Christian or other." 25

Meanwhile the Canadian Prime Minister R. B. Bennett was trying to restore optimism. Unfortunately his brisk speeches did not correspond to any original or drastic political action against the crisis. On January 2, 1932 , his words on the first page of the Globe "Worst is over now, future is glorious" look strange and disconnected from the reality. At the same time the economic downturn was accelerating and the bottom was still far from reaching. 1932 was the year that will be remembered with the first relief camps for thousands young, unemployed men; it was also the year of the devastation caused by the great droughts in the Canadian prairies. 1932 was particularly bad for rural Canada , especially for Saskatchewan . While in 1928 the people of this province had the highest net cash incomes in the world, 26 in 1932 they were among the poorest victims of depression. Saskatchewan depended on agriculture and until that time it had never experienced such an "unholy alliance" of three consequent years of low prices and droughts. Net money income from agriculture in the three Prairie Provinces in 1932-33 was down 94 percent of what it had been in 1920-29. 27 The response of provincial governments to the challenges was inadequate and ineffective despite the financial help that the Western provinces finally started to receive from Ottawa . From 1930 to 1933 the Federal Treasure spent 150,000,000 dollars for the relief of western Canada . 28 At the end of 1933 a Globe reporter writes: "Already the Dominion has assisted them [the four Western provinces] to the tune of millions, and they are seeking further cooperation in the extremity to which failure to balance their budgets, reckless expenditures, during the boom period and shrinking revenues during the last free years have brought them." 29 During this period 250 000 people left the prairies. 30

The economic bottom was reached in the spring of 1933. Canada 's gross national product sank by 43 % from 1929 to 1933. Industrial activity in the first quarter of 1933 was 57 % of the average figure for the years 1925-29. 31 The recovery that started in 1934 was slow and painful. The majority of people hardly felt the improvement.

During the Christmas week, 1933, the Prime Minister Bennett stated that it is an advantage for the young men to be brought up to know the discipline of poverty. But who really finds a dignity in misery? Yet, there were people who agreed with such assumption. It is interesting how one of Globe's readers is interpreting Bennett's words. "He [R. B. Bennett] is serious and right. Ramsey Macdonald was raised in poverty; Hitler was reared in poverty and is doing more for his people than Emperors, Junkers and scholars." 32 The reader undersigned his letter "Stalin" from Kalinin . His words are interesting because they show the emerging change of the social and political ideology of the masses during the Depression. Poverty, the hardships of Depression, had brought new political tempers and fashions. Leaders such as Hitler, Mussolini and Stalin were regarded with respect by many - in Europe and in the Americas . Even the Prime Minister King wrote a good word about Hitler in his diary defining the dictator as "a man of deep sincerity." 33


In September 1931 the Globe explains the Depression as a solely psychological phenomenon. And it really was. International and domestic socio-psychological environment during the 1920s and 1930s made the Depression possible. The Depression had been one of the causes for the Second World War and, vice versa, the Second World War was the mighty power that dragged North America from the Great Depression.

In the end of 1930s and beginning of 1940s states around the world showed miraculous strength to industrialize, transform and restructure their economies. In five years the United States and Canada resolved the problem of unemployment, the average wage in these countries rose in double digits, and after the war the economic system has been stabilized. The world economy has never reached the point that was reached during the period of Depression. After the war Canada has started a new era of building of welfare state that break off with the traditional policy of prewar period.






The worldwide economic downturn is no short-term blip but a full-fledged crisis of capitalism. Amid the din of commentary and political posturing, it is appropriate to return to first principles for a better understanding of the crisis. What are these principles? The answer requires a foray into history. | read |



1 "Inside the Meltdown" (PBS, Frontline).

2 Pauline Mayer, Merit Roe Smith, Alexander Keyssar, Daniel J. Kevles, "Inventing America . A History of The United States" (W.W. Norton & Company, 2006) , p. 701

3 Rockefellers helped with capital a bankrupted American treasury in the end of nineteenth century also.

4 John Herd Thompson and Allen Seager, "The New Economic Era," in " Canada 1922-1939," (MacClelland and Stewart, 1985), 76-104

5 "Billion in dividends to be distributed during this week" Globe, Tuesday, January 1, 1929

6 "Coast's industry ends the greatest year" Globe, Tuesday, January 1, 1929

7 Globe, Tuesday, January 1, 1929

8 "Strenuous efforts of great banks turn stampede of frantic sellers during record day on Wall Street." Globe, Wednesday, October 30, 1929

9 "Economic conditions never better. Premier King says." Globe, Wednesday, October 30, 1929

10 Globe, Wednesday, October 30, 1929

11 Globe, Thursday, October 31, 1929

12 "Canada's total trade with other countries shows steady rise" Globe, Friday, January 3, 1930

13 Except an empty rhetoric in the 20s the liberals never took serious actions against protectionism

14 Globe, Friday, January 3, 1930

15 Goods of oversupply.

16 See Charles Kindleberger, "An Explanation of the 1929 Depression," in The World in Depression, 1929-39 , (Berkeley: University of California Press, 1973), pp. 291-308

17 Globe, Wednesday, December 23, 1931.

18 "Insurance project for unemployment urged by Tom Moore," Globe, Friday, January 3, 1930

19 Some Liberals protested against the tariffs, but this was a noise, not policy. The government of King in 20s showed reluctance to remove the barriers against the foreign goods.

20 "Uncle Sam 'Goes His Way'", Globe, Thursday, December 24, 1931

21 For Canada the American Smoot-Hawley tariff of 1930 had devastating effect on agricultural export from Ontario and Quebec to U.S.

22 "Depression Explained," Globe, December 25, 1931

23 "1932: A year of Hope." Globe, December, 31, 1931

24 "A Source of revenue," Globe , December, 31, 1931

25 "Theories and Remedies," Globe , December 31, 1931

26 George Hoffman, "The Arid Years". http://www.legionmagazine.com/features/canadianreflections/97-03.asp

27 Michael Horn. "The Great Depression of the 1930s in Canada ." Canadian Historical Association, 1984

28 "Provincial parley planned at Ottawa to Discuss Finances." Globe, December 25, 1933

29 Ibid.

30 From the University lectures

31 Michael Horn. "The Great Depression of the 1930s in Canada." Canadian Historical Association, 1984

32 "Bennett on poverty," Globe, December 23, 1933

33 John Herd Thompson and Allen Seager, " Canada 1922-1939," MacClelland and Stewart, 1985, p. 316



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