Canadian Economic History: Classic and Contemporary Approaches 9780773585256

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Canadian Economic History

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Canadian Economic History * Classic and Contemporary Approaches A selection of essays edited by M.H. Watkins & H.M. Grant

Carleton University Press Ottawa

1993

©Carleton University Press, Inc. (1993), 1999 Printed and bound in Canada

Canadian Cataloguing in Publication Data Main entry under title: Canadian economic history : classic and contemporary approaches (Carleton library series ; no. #176) ISBN 0-88629-181-X (pbk.) 1. Canada-Economic conditions. I. Watkins, M.H. (Melville Henry), 1932- . II. Grant, Hugh M.K. (Hugh Murray Kenneth), 1956- . III. Series. HC113.C35 1993

330.971

C93-090482-6

Cover Design: Sally Gilmour Acknowledgements: Carleton University Press gratefully acknowledges the support extended to its publishing programme by the Canada Council and the Ontario Arts Council. The Press would also like to thank the Department of Communications, Government of Canada, and the Government of Ontario through the Ministry of Culture, Tourism and Recreation, for their assistance.

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Contents Introduction/xi Suggested Readings/xv Part One: The Staple Approach Economic Factors in Canadian History, W.A. Mackintosh/3 The Importance of Staple Products, H.A. Innis/15 A Staple Theory of Economic Growth, M.H. Watkins/19 Myth and Measurement: The Innis Tradition in Economic History, H.G.J. Aitken/39 Part Two: Early Staples, Agriculture and Finance The Fur Trade in Canada, H.A. Innis/53 "All the Fish of the Post:" Resource Property Rights and Development in a Nineteenth-Century Inshore Fishery, R.E. Ommer/61 The New Brunswick Economy in the Nineteenth-Century, P.D. McClelland/79 Why Was Specie so Scarce in Colonial Economics? An Analysis of the Canadian Currency, 1796-1830, A. Redish/85 The Efficiency of the French-Canadian Farmer in the Nineteenth Century, F. Lewis and M. McInnis/103 Part Three: Transition to Industrial Capitalism Trends in the Business History of Canada, 1867-1914, R.T. Naylor/127 The Working Class and Industrial Development in Ontario to 1890, G.S. Kealey and B.D. Palmer/141 The National Policy and the Rate of Prairie Settlement: A Review, K.H. Norrie/167 A Revision of Canadian Economic Growth, 1870-1910 (A Challenge to the Gradualist Interpretation), M. Altman/189 Part Four: Growth and Stagnation in the Twentieth Century Capital Formation in Canada, 1896-1930, K.A.H. Buckley/211 Financial Development and Capital Formation, D. Mole/223 Economic Growth in the Atlantic Region, 1880-1940, D. Alexander/239 The Evolution of Quebec Government Spending, 1867-1969, R. Dupré/267

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Contributors Aitken, H.G.J., is Emeritus Professor of Economics at Amherst College, Massachusetts. Alexander, D., (1939-1980) was Professor of History at Memorial University of Newfoundland, a member of the Maritime History Group and principal investigator of the Atlantic Canada Shipping Project. Altman, M., is Associate Professor of Economics at the University of Saskatchewan. Buckley, K.A.H., (1918-1970) taught in the Department of Economics and Political Science at the University of Saskatchewan. He was the editor (with M.C. Urquhart) of Historical Statistics of Canada. Dupré, R., is professeure agrégée, Institut d'économie appliquee, École des Hautes Études Commerciales, Université de Montréal. Innis, H.A., (1894-1952) was Chair of the Department of Political Economy and Dean of Graduate Studies at the University of Toronto. Kealey, G.S., is University Professor, Department of History, Memorial University of Newfoundland. Lewis, F., is Professor of Economics at Queen's University. Mackintosh, W.A., (1895-1970) taught Economcs and was Principal at Queen's University. While serving in the Department of Finance he drafted the White Paper on Employment and Income (1945). McClelland, P.D., is Professor of Economics at Cornell University. Mclnnis, M., is Professor of Economics at Queen's University. Mole, D., is University Lecturer in the Department of Economics and Finance at the City Polytechnic of Hong Kong. Naylor, R.T., is Professor of Economics at McGill University. Norrie, K.H., is Professor of Economics at the University of Alberta. Ommer, R.E., is Professor of History at Memorial University of Newfoundland. Palmer, B.D., is Professor of History at Queen's University. Redish, A., is Associate Professor of Economics at the University of British Columbia.

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Introduction M.H. WATKINS AND H.M. GRANT The discipline of Canadian economic history has changed dramatically during the past three decades. "Old" economic history—primarily identified with the staple thesis—has been subjected to revision by "new" economic historians and by a "renaissance" in Canadian political economy. These changes have broadened the scope of the discipline both in terms of the methodology employed and the subject matter under investigation. Development of the old school of Canadian economic history can be traced to the 1920s, and the work of W.A. Mackintosh (Queen's University) and H. A. Innis (University of Toronto). The objective was to redress the heavy "constitutional" bias dominating the writing of Canadian history. Economic development was explained primarily in terms of a succession of key staple exports (fur, cod, timber, wheat, and minerals) to more highly industrialized countries (first Prance, then Britain, then the United States). International demand set the pace of growth; the characteristics of local production determined the pattern of growth and distribution of income; and appropriate fiscal, financial, and trade institutions evolved to support the staple trade. Prom a series of industry studies emerged a unifying theme: exportation of staple products to Europe led to Canada's development on an east-west axis, a unity increasingly eroded by the shift of trade to a north-south basis. The staple approach was extended to the Maritimes by S.A. Saunders (Dalhousie University), to Quebec by A. Faucher (Universite Laval), and to the Prairies by V.C. Fowke (University of Saskatchewan) and H.C. Pentland (University of Manitoba). A comprehensive articulation was provided by W.T. Easterbrook and H.G.J. Aitken, Canadian Economic History.1 The strength of the staple thesis is the incorporation of institutional change and historical time into the analysis, crudely summarized under the rubric of "political economy." The alleged shortcoming is the absence of explicit theory: few economic historians would question the powers of observation possessed by Innis and Mackintosh, but an equally small number would suggest that the staple thesis provides an operational theory which might be generally applied. According to H.G.J. Aitken, old economic history provides powerful myths—and the term is not used in a pejorative fashion—about Canada's history, but none easily amenable to empirical verification.2 The early 1960s saw several attempts to provide the staple thesis with a more explicit theoretical foundation. Much of the impetus came from the pioneering empirical work of M.C. Urquhart, K.A.H. Buckley, O.J. Firestone and P. Hartland, which provided new grist for the economic historian's mill. G.W. Bertram explained Canadian economic growth in terms of steady diversification around primary resource industries; M.H. Watkins recast the staple

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thesis in terms of a Keynesian multiplier-accelerator model; and more recently Richard Caves's "vent-for-surplus" model placed the staple thesis in the context of a traditional neo-classical growth theory. Dominance of the staple approach persisted until 1967, when the publication of E.J. Chambers and D.F. Gordon's "Primary Products and Economic Growth" signalled the emergence of new economic history in Canada. Wedding neoclassical theory and econometric techniques provided an analysis challenging many, and reinforcing some, of the conventional wisdoms of the old economic history. This revisionist interpretation sought to provide a more rigorously specified economic model; typically, although not without frequent exception, such model building was based upon neoclassical assumptions of economic rationality and the "maximizing" behaviour of individual economic agents. Further, it insisted upon a clearly defined hypothesis amenable to empirical testing, and counterfactual reasoning was frequently employed for this purpose. New economic historians have since made several important contributions to our understanding of Canadian economic development prior to 1867. In the fur trade, the economic behaviour of aboriginal peoples is recast in terms of neoclassical rationality, while a games-theoretic approach has been employed to explain the competitive dynamic among European trading companies; the dependence of New France upon the fur trade, colonial New Brunswick upon timber, and Upper Canada upon wheat exports is questioned; and early financial development has been explained without reference to staple trades. Post-Confederation history is the subject of even greater revision. John Dales's critique of the conventional interpretation of the "national policies" as the stimulus to development in the late nineteenth century initiated a reassessment of the role of tariffs, railways, and land policy for western expansion. Evidence of a wide ranging industrial revolution in central Canada leads several authors to question whether the period 1873-1896 was truly the "Age of Disappointment" ; while following Chambers and Gordon, the contribution of the "wheat boom" to growth after 1896 is the subject of intensive, and apparently unending, scrutiny. The role of monetary policy, domestic financial markets and international capital flows in the early twentieth century is receiving renewed attention after years of neglect. Other recent studies consider trends in real wages; the distribution of income and wealth; unemployment relief in the Great Depression; the divergent paths of industrialization in Ontario and Quebec; and technological change in manufacturing. Methodological differences between the new and old economic history are frequently overstated; by the 1960s there was a shared attempt to apply more formal theoretical models to the study of economic history. But this has occurred at some cost: the discipline has become less accessible to a wide audience and less relevant to historians in general.3 Aitken suggests that the attempt to "demystify" Canadian economic history—to strip it of its conven-

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tional wisdoms—has lost much of its momentum, a state of affairs which he attributes, in part, to the restrictions imposed by neoclassical theory and, in part, to the need to shift from the destruction of old myths to the creation of new ones. In the absence of a new interpretative framework, traditional economic history in Canada, like the discipline elsewhere, is at a crossroads.4 Concurrent with the development of new economic history, "new" political economy—which borrows from economists outside the neoclassical mainstream and ranges beyond the discipline of economics—has emerged in Canada. This work has three distinct thrusts. Defenders of the staple thesis argue that it offers a broader, more relevant research agenda for the investigation of institutional change over time. The objective, then, is to "rehabilitate Innis" by lending greater analytical robustness to the general directions suggested by his work. Central to much of this literature is the vulnerability of an economy heavily reliant upon foreign capital and natural resource exploitation. A second approach, best exemplified in the journal Acadiensis and the Atlantic Canada Shipping Project at the Memorial University of Newfoundland, examines the consequences for Atlantic Canada of the uneven development of capitalism. A third variant draws more on the work of writers such as Marx, and tends to reject the staple thesis as a fruitful starting point for writing Canadian economic history. The most notable work in this respect is undertaken by labour historians who, in many instances, have already written much of Canada's industrial history. The motivation for this collection of papers is twofold. First, it seeks to reflect the competing theoretical approaches to economic history in Canada. It begins with the assertion that the works of the old economic historians still deserve to be read, albeit critically. More recent approaches include the attempt to extend the staple approach; revisionist analysis from new economic historians; and a range of papers from new political economists. Second, methodological changes have been accompanied by a substantial broadening of the subject matter of economic history. Traditional problems of explaining the rate and pattern of economic development persist; however, aspects of labour and regional history, provincial public finance, and the development of local capital markets are receiving long-overdue attention. The objective, therefore, is to include a variety of theoretical approaches used to examine important issues in Canadian economic history.

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Notes [I] See also the recent collection of papers by W.T. Easterbrook, in I. Parker, ed., Economics and Uncertainty, (Toronto, 1988). [2] H.G. J. Aitken, "Myth and Measurement: The Innis Tradition in Economic History," in this collection. [3] R. Sutch, "All Things Reconsidered: The Life-Cycle Perspective and the Third Task of Economic History," Journal of Economic History (1991) 51:271-88. A summary of trends in the discipline is provided by R. Whaples, "A Quantitative History of the Journal of Economic History and the Clinometric Revolution," Journal of Economic History (1991) 51:289-302. [4] A.J. Field (ed.), The Future of Economic History (Boston, 1987).

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Suggested Farther Readings Armstrong, R.,"The Efficiency of Quebec Farmers in 1851," Histoire Sodale/Social History (1984) 17:149-64. Carlos, A.M. and E. Hoffman, "The North American Fur Trade: Bargaining in a Joint Profit Maximum under Incomplete Information, 1804-1821," Journal of Economic History (1986) 46:967-86. Cohen, M.G., Women's Work: Markets and Economic Development in Nineteenth Century Ontario (Toronto, 1988). Dick, T.O. and J. Floyd, "Balance of Payments Adjustment under the International Gold Standard, Canada 1871-1913," Explorations in Economic History (1991) 28:209-38. Drummond, I.M., Progress without Planning: The Economic History of Ontario from Confederation to the Second World War (Toronto, 1987). Easton, S.T. and W.A. Gibson, and C.G. Read, "Tariffs and Growth: The Dales Hypothesis," Explorations in Economic History (1988) 25:147-63. Evans, L.T. and N. Quigley, "Discrimination in Bank Lending Policies: A Test Using Data from the Bank of Nova Scotia, 1900-37," Canadian Journal of Economics (1990) 23:210-25. Inwood, K. and T. Stengos, "Discontinuities in Canadian Economic Growth, 1870-1985," Explorations in Economic History (1991) 28:274-86. Lewis, F. and M. Mackinnon, "Government Loan Guarantees and the Failure of the Canadian Northern Railway," Journal of Economic History (1987) 47:175-96. Mclnnis, M., "A Reconsideration of the State of Agriculture in Lower Canada in the First Half of the Nineteenth Century," in O.K. Akenson, ed., Canadian Papers in Rural History (Gananoque, 1982), 3:9-49. Mackinnon, M., "Relief not Insurance: Canadian Unemployment Relief in the 1930s," Explorations in Economic History (1990) 27:46-83. Osberg, L. and F. Siddiq, "The Inequality of Wealth in Britain's North American Colonies: The Importance of the Very Poor," Review of Income and Wealth (1988) 34:143-63.

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Sweeny, R., "Paysan et ouvrier: du féodalisme laurentien au capitalisme québécois," Sociologie et Sociétés (1990) 22:143-61. Urquhart, M.C., "New Estimates of Gross National Product, Canada, 1870-1926: Some Implications for Canadian Development," in S. Engermann and R.E. Gallman (eds.), Long-Term Factors in American Economie Growth, National Bureau of Economie Research, Studies in Income and Wealth, vol. 51 (Chicago, 1986), 9-94. Wylie, P.J., "Indigenous Technological Adaptation in Canadian Manufacturing, 1900-1929," Canadian Journal of Economies (1990) 23:856-72.

Part One

The Staple Approach

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Economic Factors in Canadian History W.A.

MACKINTOSH1

There will be few dissenters from the position that more attention should be devoted to the geographic and economic factors in Canadian history, and that greater place should be given to the continental aspects of Canadian history. Up to the present [1923] the constitutional bias has been strong, and for the obvious reason that the most recent and in many ways the most significant chapter of British constitutional history has been written in Canada. The familiar schoolbook periodization of the history of British North America in terms of succeeding instruments of government is sufficient illustration of this bias of the British constitutionalist. The artless query of a high school pupil, "Was everybody a member of parliament then?" indicates the false picture that has been too frequently drawn. It is true that of late years more attention has been given to the economic and geographic factors, but in many cases the chapters on constitutional development have not been in the least influenced by the addenda on "social and economic progress" or by the introduction on "physical characteristics." Constitutional crises lose none of their great importance when viewed as the periodic results of changing conditions, and of the needs and political prepossessions of various elements of the population. History is emphatically not "past politics"; it is the life of yesterday in the present. The simplest features of American geography are of primary importance in understanding the developing life of the people of this continent. The initial fact to be noted is that for several reasons, structural and climatic, North America faces Europe. That is to say, by far the greater part of this continent is most easily accessible from the Atlantic coast. This has facilitated, though not accounted for, the success of European rather than Asiatic colonization. The evolution of energetic, industrious, forthfaring peoples under the peculiarly favourable climatic conditions of northwestern Europe is the most important element in that success. If then we start with the fact of the European colonization of the Atlantic coast, the structure of American barriers, plains, and waterways takes on a special significance. That structure shaped the course of westward progress; it facilitated or hindered the connection of the frontier with the older settlements and with Europe; it selected to some extent its own settlers; and together with other factors it determined the trend of industrial production. Structurally, North America, in broad terms, is made up of narrow coastal plains on the Atlantic and the Pacific, the old glaciated Laurentian plateau Source: W.A. Mackintosh, "Economic Factors in Canadian History," The Canadian Historical Review (March 1923) 4(l):12-25. Reprinted by permission of the University of Toronto Press.

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around Hudson Bay, and a great central plain from the Appalachians to the Rockies, with no significant uplift barrier from the Gulf of Mexico to the mouth of the Mackenzie. The presence of the Appalachian barrier to westward movements of population and commerce has given premier importance to the existing gaps in that barrier, of which two, the Mohawk and the St. Lawrence valleys, outrival all others. The partial gaps of Pennsylvania, the Cumberland, and the southwesterly valley of the Shenandoah have all played important parts in American history; but New York today is witness to the significance of the Mohawk valley, as is Chicago to that of the St. Lawrence. When the Dutch and French controlled both gateways to the interior, English colonies built solid communities in the coastal and piedmont regions. Meanwhile the French followed the westward path of the St. Lawrence to discover the basic fact of modern Chicago, namely, that the low watershed causes the St. Lawrence there to pivot on the Mississippi, and on that fact France built a grandiose policy not of settlement but of empire: a policy which failed because of the weakness of the initial settlements. When the forerunners of British settlement began to enter the central valley and speculative ventures such as that of the Ohio Company about 1745 were set on foot, FVance and Britain inevitably clashed. They clashed on the upper tributaries of the Ohio where France was busily constructing a line of forts to block British progress into the interior. In later years the war took a European name, the Seven Years' War. Hostilities, however, began earlier in America; they had a distinct American objective, and that objective was not Canada—which was scarcely preferable to Guadeloupe—but the Mississippi valley. From about 1763 on, the rapidly increasing population of the old colonies overflowed into the Mississippi valley. New England, spreading north and west, entered the valley of the St. Lawrence in the Green Mountain state; and because of its geographical relation to Canada, Vermont did not enter the Union until 1791, ignored the Non-intercourse Act, and was an unwilling and halfhearted partner in the War of 1812. New York and Pennsylvania were already expanding along the Mohawk and the upper Ohio valleys and the men of Virginia occupied the valleys of Tennessee and Kentucky. New problems brought new movements, and the "men of the western waters" became a significant element in American legislatures. Later, and with different setting, the same movement into the interior took place in Canada. The American Revolution, the causes of which were not unconnected with the occupation of the West, turned part of the westward movement to the Loyalist settlements of the St. Lawrence valley. At the same time, and later, British immigration augmented the increasing population of the western frontier of Canada. That old West of Canada differed from the settlements of Lower Canada not only in race and religion but in the pioneer problems it had to face.

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In those brilliant introductions to his Readings in the Economic History of the United States, the late G.S. Callender set forth the basis of colonial economy. "Progress does not take place unless the colony possesses markets, where it can dispose of its staple products. The history of modern colonization does not show a single case where a settled country has enjoyed any considerable economic prosperity, or made notable social progress without a flourishing commerce with other communities." The prime requisite of colonial prosperity is the colonial staple. Other factors connected with the staple industry may turn it to advantage or disadvantage, but the staple in itself is the basis of prosperity. The colonies of North America were fortunate in being capable of producing staples which for the most part found ready markets in Europe. Virginia and the other southern colonies found in tobacco, indigo, naval stores, and other products excellent colonial staples, on which the prosperity of the South and southern culture were based. In the north, French furs found ready sale, but the conditions of the industry brought few advantages to the settlement. New England and the Middle Colonies were less favourably endowed. Their products were not dissimilar to those of Europe, and the markets were small and uncertain. Hence the importance to them of the development of the West Indian trade, of which the trade in "rum and niggers" was an important part but by no means the whole, and which brought prosperity to the Boston of commerce and shipping before manufacturing New England had arisen. Nothing is more typical of colonial development than the restless, unceasing search for staples which would permit the pioneer community to come into close contact with the commercial world and leave behind the disabilities of a pioneer existence. Contemporary records abound with the tales of the projects of the faddist and propagandist of new staples, and much money and energy were spent on experiments. In the tidewater settlements of the British colonies the problem, though not without difficulty, was fairly solved because transport was cheap and Europe and the West Indies comparatively near. In Lower Canada, part of the population was lured by the prizes of the fur trade to the unsettled, vagabond life of the woods, which combined with missionary zeal to spread French names from Acadia to New Orleans and the Mackenzie. The other part, vainly endeavouring to produce an agricultural staple, took on more and more the permanent characteristics of a pioneer community which has failed to rise beyond the stage of primitive diversified agriculture, a self-sufficient, conservative peasantry. As successive waves of population moved into the upper St. Lawrence and Mississippi valleys the problem intensified.2 The Appalachian barrier intervened between the frontier and tidewater, and transportation became a dominant factor in American trade. Not only, however, did the eastern barrier of Appalachia confront the pioneer of the central valley with a new problem, but the possible products of the western country were limited. In spite of innumerable experiments they did not extend beyond grain and timber products,

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both durable enough but bulky, ill-adapted to the transportation of that day, and with little possibility of becoming profitable staples in any way comparable to southern tobacco or cotton until phenomenal changes had been made in means of transportation. Much might be written of the attempts to establish other staples such as hemp in Lower Canada, or to concentrate the bulk of native products to transportable proportions. The potash trade, partially successful, but handicapped by the smallness of the market, the domestic whiskey manufacturing of Kentucky, still surviving in the hill districts, and the industry which gave to Cincinnati its early nickname of Porkopolis, were all attempts to reduce the bulky products of the central valley to transportable size and to establish the greatly-to-be-desired staple. These obvious facts of the work-a-day colonial world were the conditions upon which colonial policy operated. We have already noted the geographical unity of the two great valleys of the continent and the influence which that unity has had on the history of Canada and of the United States. Up to 1763 the St. Lawrence and Mississippi were linked politically. Marquette and La Salle discovered the easy portages between the river basins and the great river beyond. The Seven Years' War was a war for the central valley, which the French had explored but which the British colonists were ready to occupy. After the conquest, when the Guadeloupe-Canada controversy had been finally decided, the valley was not broken but united with the coast settlements. From 1763 to the Revolutionary War, North America was a free trade area, and the exploitation of it one of the most pressing questions. Disputes between home authorities and the colonies as to the regulation of that exploitation, as shown in the attitude of Shelburne and his successors in prohibiting settlement west of the Alleghenies in 1763, were one, although only one, of the causes of the American Revolution. With the concession of independence by Great Britain and the establishment of the Mississippi as the western boundary of the United States, the St. Lawrence and Mississippi were divided, and North America fell apart into the protected regions which remained until the Reciprocity Treaty of 1854 partially restored free trade. This period from 1783 to 1854 (limits more significant than the usual 1791 to 1840) embraces the great age of westward expansion. Although the days of seafaring New Englanders and Nova Scotians were not yet gone, America turned her back on the Atlantic and entered the era of internal expansion. In that expansion, two factors are of prime significance: first, the barriers to westward advances; and second, the barriers making difficult the continued communication with the older settlements. From the first of these the United States in this period was singularly free. Once through the Appalachian barrier the great plain of the Mississippi gave an open road to the Rockies. Formidable obstacles in the shape of dense forests there were indeed until the open prairie was reached, but no great barrier. To the west, Canadian settlements in the St. Lawrence valley met the impassable barrier of the Laurentian highlands,

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bordering the Upper Lakes on the north so closely that for half a century progress into the easily settled prairie region beyond was effectually blocked. The immediate consequences of handing over to the United States the upper Mississippi valley, to which access from the St. Lawrence was easy, were to be seen in the bitter struggles of the fur trade, the vain attempts of Canadian traders to retain the western forts at the time of Jay's Treaty, and the losing fight of the singularly able North West Company with their better personnel of French and Scottish traders against the exclusion policy of John Jacob Astor to the south and the ruthless competition of the Hudson's Bay Company to the north. In 1816 the Exclusion Bill was passed, and the company which depended for its existence on the connection of the St. Lawrence with the West, was "submerged" (as one of the partners said) in the Hudson's Bay Company in 1821. In its communication with the old settlements Canada was more fortunate. The St. Lawrence valley was a line of communication only partly open to the United States. The good fortune was, however, not unmixed. The St. Lawrence linked the frontier of the West, not with expanding, welldeveloped communities such as the Atlantic states, but with a community whose commerce depended entirely on the interior and which was surrounded by a stable, conservative population, to a large extent self-sustaining, with laws and customs noncommercial, and giving rise to little commerce. There was for the St. Lawrence no manufacturing New England and no cotton-growing South. Further, though the St. Lawrence, the Ottawa, the Trent, and other tributary valleys gave an open road to the voyageur, the fur trader, or even the incoming settler, the way was by no means open for the return traffic of the timber and grain products of the western settlements. For half a century the scattered Canadian settlements entered into strenuous competition with the other routes from the interior to the seaboard. The Potomac Company, the Pennsylvania route, and the phenomenally successful Erie Canal were met by the stupendous efforts of the St. Lawrence canal system. The Erie had the great advantage of being complete before the British had grasped the problem, and when they were still occupied with the commercially useless Rideau. Most significant of all, the Erie was not a separate system, but a means of linking the upper St. Lawrence system with tidewater at New York. The existing stage communications had made the Albany route familiar to Upper Canadians, and the early opening of the Erie gave to New York a quantity of traffic which Montreal could not hope to equal for many years; and ocean freight rates to and from New York long reflected the better chances of getting both outgoing and ingoing cargoes. In Canada of the first half of the nineteenth century we have a country in which population was moving westward to occupy the upper St. Lawrence and Lower Lake regions at the same time as, at a much more rapid rate, the population of the United States was moving in great waves into the contiguous

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Mississippi valley. The people of both these regions, though not of identical origin and with varied equipment for living, faced the same problem, confronted the same deficiency for colonial prosperity, the lack of a compact, saleable, transportable staple. In the case of the United States, however, the early building of the Erie Canal, the effective connection of the Mississippi with the cotton-growing South, and the much greater and more prosperous coast settlements gave a value to grain and timber products not found in Canada. The Canadian settlements in consequence lacked the prosperity which Durham and other observers noted in neighbouring parts of the United States. Not only, then, was Canadian development frustrated geographically at the northwest barrier of the Laurentian plateau, but economic and geographic facts constituted a frustration in the East. These were the conditions with which commercial policy had to deal. In the United States the producers of bulky products in the upper central valley developed views of commercial policy different from those of the cotton planter of the South with a staple not only readily transported, but with a European market undergoing phenomenal expansion. The course of the tariff history of the United States illustrates the changing policies which these conditions occasioned. Those conditions made the home market argument a powerful one in the middle and western states, while the commercial elements of New England and the planters of the South favoured free trade. It was this growing divergence in economic characteristics which formed the basis for the struggle between North and South whether the specific occasion might be the tariff or the extension of slavery. The divergence was one of conditions rather than of people, though in succeeding generations conditions produced diverging types of people also. Yet families like that of Henry Clay passed from the Carolinas to Kentucky. The Carolinian by descent becomes "Harry of the West" in a western environment. The free-trader by inheritance becomes a protectionist when confronted with a western problem. The commercial policy of Canada was part of the British Colonial System. It became so in 1763, and after 1783 the system was more carefully applied. The old system, based on a theory of subtropical colonial staples, still continued, as seen in the projects in Canada for the growing of hemp and the regulation of the cutting of ships' timber. In addition, however, a newer mercantilism, directed towards cheap food and materials, was finding a limited expression, and the need for building a stable settlement was also apparent. One aspect of British policy is to be found in the attempt to substitute Canada for New England and the Middle Colonies in the West Indian trade. Another is seen in the encouragement offered by preferential duties on Canadian timber and grain. Both of these policies just failed of success. Partly because of ill-adjustment of bounties and duties to specific conditions in the West Indian trade, as shown by the numerous complaints from Quebec merchants, and partly because inertia made it difficult to substitute

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satisfactory trade connections with Canada for the familiar New England trade, the West Indian trade did not take strong root in Canada, though it was somewhat more successful in the Maritime Provinces. The West Indian market for Canada was uncertain and difficult of access. Canadian production responded only slightly to a varying stimulus. In turn, effect became cause, and Canadian grain and lumber, uncertain and variable in supply, was unable to support the irregular West Indian demands. The results were bitter complaints from both colonies. The prohibition of trade with the United States endangered the supplies of the British West Indies and put them at a disadvantage with the other islands depending on American trade. The advantages of steady supply, of nearness, and of familiarity with the trade were clearly with New England and the Middle States. When trade relations between the United States and the West Indies were broken off, as between 1826 and 1832, Canadian trade boomed and the western settlements flourished. With, however, the acceptance by Jackson of Huskisson's proposals, and the resumption of trade, the wave of prosperity subsided, and Canada once more strove with the task of Sisyphus. Less need be said in regard to the failure of the preferential policy toward grain and timber. Dr. Shortt's Imperial Preferential Trade and his articles in Canada and Its Provinces have made that failure abundantly clear. Before 1825, the complete prohibition of colonial grain (when the price was below 67 shillings) made trade spasmodic and ill-organized. The setting of a fixed duty on colonial grain, and later the adoption of the sliding scale, made matters better, but the direct trade in grain was not great. During the forties, the point of interest was not so much Canadian grain as it was American grain making use of the newly built St. Lawrence canals and obtaining the advantage of the Canadian preference. Montreal interests favoured the free export of American grain through Canada after paying the Canadian duty. Sir Robert Peel's much-quoted words about Canada being an "integral part of the Empire" were repeated by the Montreal dealers to support their policy; and while the Canada Corn Law did not admit American grain shipped by the St. Lawrence route free, flour ground from that grain was freely admitted. This act, which legalized much that had been carried on extra-legally, gave a fillip to the St. Lawrence flour industry; and the repeal of all duties on wheat and flour some years later was a staggering blow to these interests, since the trade depended on this artificial stimulation. The economic and geographic union of the upper St. Lawrence waterway and the opening grain country of the American West was obvious, but, as Montrealers pointed out, the lower outward rates from New York more than counterbalanced the higher rates from the interior to New York. The withdrawal of the preferences brought a similar and worse collapse in the timber trade, which had been considerably stimulated by the protection offered, although here too the trade was spasmodic and irregular. Further, the

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timber trade had some of the peculiarities of the fur trade in its opposition to homemaking and its absentee ownership, and brought some of the same unfortunate results to the regions affected. Prom one point of view the preference system was merely a continuation of imperial commercial policy. Prom the point of view of western Canada, however, it was an attempt to overcome the natural obstacles of the bulky products of the St. Lawrence valley and assure them a European market. More effective than the preference toward this end were the substantially complete St. Lawrence canals. The St. Lawrence lacked some of the advantages of the Erie. The volume of traffic was small and the outward rates from Montreal relatively high. Any considerable stimulus might have brought success, but economic events and conditions combined in the depressing years of the late forties to snatch success away. In 1850 British commercial policy had just failed to attain its object. As the population of the United States spread across the Mississippi valley to possess it, new problems and new political forces arose in American history. The upper valley faced the same problem of bulky products which confronted western Canada. Thanks to the larger population, the rise of manufacturing in New England, the opening of the Erie Canal, the expansion of the cotton staple in the South, and the access to the South by the Mississippi, the United States solved its problem, though not without difficulty. Out of those difficulties in that period arose typical western forces. The adoption of protection, the opposition to "the money power" and the United States banks, the leaning toward "soft" money, and the pressure for internal improvements came out of western conditions of life. Triumphant pioneering democracy rose to its height in the election of Andrew Jackson, important less for himself than for the forces in American life which he represented. Crudities and lack of culture in that period there were, enough to excite the mirth of Goldwin Smith, but strength and national unity were also there. Confronted with nullification in Carolina and the extension of slavery in Kansas, those who stated and enforced the national position, were men of the West and the Mississippi valley, Jackson and Lincoln. One looks in vain in Canadian history in the first half of the nineteenth century for any such triumphant movement of western forces. In the opposition to the Bank of Upper Canada, the division between the West and commercial Montreal, the disputes over the clergy reserves, and the land policies of the Family Compact, similar situations brought similar reactions, but there was no effective movement. An easy explanation for this difference is the divergence between Canadian and American "political nature." Canadians, it is said, have never in politics gone to the extremes of their southern neighbours, nor have they expressed themselves so much in popular movements. There is truth in the statement, but the difference is not accounted for. The pioneers of the American and of the Canadian West came from the same sources—the British

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colonies. It could scarcely be argued that the addition of Scottish elements represented by individuals such as Gourlay and Mackenzie added soberness to political life. Nor yet did English or Irish immigration bring steadier policies. There was no Jacksonian democracy and no Jackson in Canada because up to 1850 western development in Canada was doubly frustrated, at the east by the difficulties of the St. Lawrence route, and the European market for bulky staples, and at the west by the impassable barrier of the Laurentian highlands. Important as were the constitutional issues of 1837, particularly in the minds of argumentative Scots, there was also a basis of economic failure. Not the least of the distinctions of Durham and Sydenham is that they saw this. Constitutionally, Sydenham was wrong, for he knew little about government. Economically he was right, for he knew much about business. When failure became more apparent in 1849, the Annexation Manifesto was a gesture of despair on the part of the most articulate portion of a frustrated colony. The middle of the century brought a new era in Canadian history. The Lord Elgin who recognized the necessity of granting responsible government freely was no greater statesman than the Lord Elgin (pupil of the singularly able Hincks) who saw a partial relief from frustration in the Reciprocity Treaty of 1854. What the result of that treaty would have been had outside events been different is difficult to say. Combined with the improvement of land and water transportation, and the substantial rise in grain prices resulting from the Crimean War, the larger local market, which the treaty gave, brought relief to the blocked colony. For more than half a century western Canada had striven to reach the goal of colonial existence, the production of a staple export commodity. With this period the country passed from the stage of primitive diversified agriculture to the one-crop stage, the period (in the phrase of the late C.C. James) "when wheat was king." Although not without its variations that period lasted until the end of the Civil War and the repudiation of the Reciprocity Treaty. The various phases of that period of abounding prosperity, with its railway politics, bank expansion, and incidental protection, are sufficiently well known. Economically, Canada was passing out of the colonial stage. It would be dangerous to attempt to trace the direct political effects of these conditions. Constitutional difficulties, the supposed menace of an American army, the position of Quebec, and personalities were all solid and significant factors in the coming of Confederation. It is not unfair to say, however, that the dynamic factor which necessitated a constitutional readjustment was the expansion of Canada West in the previous fifteen years. Prosperity and expansion underlay "Representation by Population." The St. Lawrence valley, the Grand Trunk Railway, and the grain trade were uniting factors in Canada. The expanding West demanded proportionate weight in a national government. Differences of race and of geography necessitated federal government.

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This period of expansion saw the substantial breaking of the eastern frustration of Canadian development. True, dark days in the seventies and later followed, but once lifted from the frontier stage, the community was changed. The Ontario which turned to cheese, fruitgrowing, and small manufacture during the years of trial was a different community from that which had depended on the uncertain support of the British preference fifty years before. There remained at Confederation the problem of the West. The Laurentian barrier, making impossible the commercial connection of the St. Lawrence with the north central valley, continued to be the solid dominating face of Canar dian development. There could be no Canadian Chicago because there was no meeting of waterway and prairie to the north of the lakes. Grand Portage at the head of Lake Superior, with its well-nigh impassable trail to Winnipeg, was the sorry northern counterpart of Chicago. In the last half of the nineteenth century, as from the beginning, Canadians found the easiest field of westward expansion in the upper Mississippi valley. Fifty years before they had hoped that the necessity of St. Lawrence navigation would bring the population of the American West into a working union with Canada. Great as was the effort of the St. Lawrence canals, it failed to accomplish all that was expected. The upper Mississippi valley was preempted irrevocably by the United States. After the Civil War there could be no question of that. In the years that followed it seemed that the maxim of Henry Tudor would be justified, and that the greater would draw the less. After 1870, the cream of the immigrant and native population was drawn off to the easily settled prairie regions of the upper Mississippi. The new West of the Canadians was the American north west. The Canadian frontier was the American frontier. In that period all the vitality which a moving frontier absorbs from a people, and gives back again, was lost to the communities of Canada. The export of people was draining the very life-blood of Ontario rural settlements. Canadian development was once more thwarted by geography. It is this western frustration of Canadian development that furnishes the background for the construction of the Canadian Pacific Railway, and for the "transcontinentalism" of present-day Canadian transportation. As first put forward, the Canadian Pacific project was an audacious, even foolhardy attempt to bridge the gap between Ontario and British Columbia; and from that point of view the gloomy prophecies that the road would not pay for its axle-grease were "safe and sane" judgments. Although the construction of the railway was a part of a contract with British Columbia, the justification of the railway, and ultimately its salvation, was the north central plain of the Prairies. That portion of the railway which links Winnipeg with Lake Superior was and is the most essential part of Canada's transportation system. It gave the St. Lawrence valley access to a country capable of rapid expansion. Other parts of the railway system were important and essential, but none has had the significance of that section which overcomes the Laurentian barrier between

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the Great Lakes and the Prairies. With the building of the Canadian Pacific and its coming to effectiveness in the nineties, just when forces external to Canada were bringing grain prices to higher levels, the western barrier was substantially overcome, and a period of phenomenal expansion set in. Once more a Canadian region by reason of higher prices for grain and improved transportation facilities overcame its physical barriers and entered a one-crop stage of agriculture, the stage of the world staple and of prosperity. That period of expansion from about 1900 to 1913 was not only a period of growing western settlement, but a time of solid progress in almost all parts of the Dominion. It is as significant for the eastern manufacturer and the Northern Ontario miner as for the western homesteader. Canada had room for expansion within her borders. A staple was exported to world markets; and, as southern cotton started the wheels of American industry and commerce in the nineteenth century, western wheat has permitted the initial step of the Canadian advance in the twentieth. It was only one commodity, and there were many; but it was the basis of that period of prosperity. The world staple primed the pump of Canadian industry. To Canadians of the present generation political writings of fifty years ago read strangely. Annexation, commercial union, Zollverein, Canada First, Imperial Federation, these have no place in contemporary politics. We are less sensitive on these points. It is difficult to realize that Canadians ever believed in them. The difference is not in Canadians. It is in the economic background. When frustration of Canadian progress was overcome, and a period of expansion resulted, Canadian nationality was assured, and policies which cast doubt upon that nationality fell away. For the first time in Canadian history, powerful and effective western forces made themselves felt. For the first time western problems became capable of solution. The end is not yet; for the West still struggles in time of world depression with a bulky staple and a long transportation haul. But improvements in transportation have made problems not insoluble. A new factor has arisen in the existence of a manufacturing East. Another is developing in the opening of the Pacific trade; and still another, of unknown significance, will come into play as the forest frontier of the north is attacked in earnest. Canada is a nation created in defiance of geography, and yet the geographic and economic factors have had a large place in shaping her history. It is not contended that these are the only factors. Others have been often and adequately dealt with. But unless one is to consider Canada merely as a collection of racial types and not as a nation, the basic facts of economic and historical geography can never be ignored. In Canadian history as it is written, there is much of the romance of the individual, sometimes significant and sometimes not. It behooves present-day historians to perceive the romance of a nation in the story of a people facing the prosaic obstacles of a colonial existence, developing national traits, and winning through to nationhood.

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Notes [I] In a footnote to the original publication of this essay in 1923 Dr. Mackintosh wrote: "The present article contains the substance of two lectures in Canadian economic history given at the School of Historical Research at Ottawa during the summer of 1922. The thesis is presented as one which the writer thinks susceptible of proof, but which cannot be taken as proved until further research has established it on a sound basis. Much elaboration and obvious illustration have been omitted in order that the argument might be presented within reasonable compass. As originally given, the lectures purported to show the relation of economic and geographic factors to general history, and to suggest the great need for detailed research in many phases of Canadian economic history. "The point of view of the article has been suggested by the writings of Professor F.J. Turner and the late Professor G.S. Callender." [2] Readers familiar with F.J. Turner's Rise of the New West, 1819-1829 (Gloucester, Mass., 1961) will recognize the writer's indebtedness to it.

The Importance of Staple Products H.A. INNIS Fundamentally the civilization of North America is the civilization of Europe. The opening of a new continent distant from Europe has been responsible for the stress placed by modern students on the dissimilar features of what have been regarded as two separate civilizations. On the other hand communication and transportation facilities have always persisted between the two continents since the settlement of North America by Europeans, and have been subject to constant improvement. Peoples who have become accustomed to the cultural traits of their civilization—what G. Wallas calls the social heritage—on which they subsist, find it difficult to work out new cultural traits suitable to a new environment. The high death rate of the population of the earliest European settlements is evidence to that effect. The survivors live by borrowing cultural traits of peoples who have already worked out a civilization suitable to the new environment as in the case of the Indians of North America, by adapting their own cultural traits to the new environment, and by heavy material borrowing from the peoples of the old land. The process of adaptation is extremely painful in any case but the maintenance of cultural traits to which they have been accustomed is of primary importance. A sudden change of cultural traits can be made only with great difficulty and with the disappearance of many of the peoples concerned. Depreciation of the social heritage is serious. The methods by which the cultural traits of a migrant civilization may persist with the least possible depreciation involve an appreciable dependence on the peoples of the homeland. Migrants are not in a position immediately to supply all their needs and to maintain the standard of living to which they have been accustomed, even with the assistance of Indians, an extremely fertile imagination, and a benevolent Providence such as would serve Robinson Crusoe or the Swiss Family Robinson on a tropical island. If those needs are to be supplied they will be forced to rely on goods which are obtainable from the mother country. These goods were obtained from the homeland by direct transportation as in the movement of settlers' effects and household goods, involving no direct transfer of ownership, or through gifts and missionary supplies, but the most important device was trade. Goods were produced as rapidly as possible to be sold at the most advantageous price in the home market in order to purchase other goods essential to the maintenance and improvement of the current Source: H.A. Innis, The Fur Trade in Canada: An Introduction to Canadian Economic History, rev. ed. (Toronto, 1956), 383-386. Reprinted by permission of the publishers.

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standard of living. In other words these goods supplied by the home country enabled migrants to maintain their standard of living and to make adjustments to the new environment without serious loss. Migrants were consequently in search of goods which could be carried over long distances by small and expensive sailboats and which were in such demand in the home country as to yield the largest profit. These goods were essentially those in demand for the manufacture of luxuries, or goods which were either not produced or produced to a limited extent, in the home country, such as gold, furs, and fish. (Fish was in some sense a luxury under the primitive conditions of agriculture in Europe and the demands of Catholic peoples.) The importance of metropolitan centres in which luxury goods were in most demand was crucial to the development of colonial North America. In these centres goods were manufactured for the consumption of colonials and goods produced in the colonies were sold at the highest price. The number of goods produced in a northern temperate climate in an area dominated by Precambrian formations, to be obtained with little difficulty in sufficient quantity and disposed of satisfactorily in the home market under prevailing transport conditions, was limited. The most promising source of early trade was found in the abundance of fish, especially cod, to be caught off the Grand Banks of Newfoundland and in the territory adjacent to the Gulf of St. Lawrence. The abundance of cod led the peoples concerned to direct all their available energy to the prosecution of the fishing industry, which developed extensively. In the interior, trade with the Indians offered the largest returns on a commodity which was available on a large scale and which yielded substantial profits, namely furs and especially beaver. With the disappearance of beaver in more accessible territory, lumber became the product which brought the largest returns. In British Columbia gold became the product following fur, but eventually lumber and fish came into prominence. The lumber industry has been supplemented by the development of the pulp and paper industry, with its chief reliance on spruce. Agricultural products—for example wheat—and later minerals—gold, nickel, and other metals—have followed the inroads of machine industry. The economic history of Canada has been dominated by the discrepancy between the centre and the margin of western civilization. Energy has been directed toward the exploitation of staple products and the tendency has been cumulative. The raw material supplied to the mother country stimulated manufactures of the finished product and also of the products which were in demand in the colony. Large-scale production of raw materials was encouraged by improvement in techniques of production, in marketing, and in transportation as well as by improvement in the manufacture of the finished product. As a consequence, energy in the colony was drawn into the production of the staple commodity both directly and indirectly. Population was involved directly in the production of the staple and indirectly in the production of

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facilities promoting production. Agriculture, industry, transportation, trade, finance, and governmental activities tend to become subordinate to the production of the staple for a more highly specialized manufacturing community. These general tendencies may be strengthened by governmental policy, as in the mercantile system, but the importance of these policies varies in particular industries. Canada remained British in spite of free trade and chiefly because she continued as an exporter of staples to a progressively industrialized mother country. The general tendencies in the industrial areas of western civilization, especially in the United States and Great Britain, have had a pronounced effect on Canada's export of staples. In these areas machine industry spread rapidly because of the accessibility of all-year-round ocean ports and the existence of ample supplies of coal and iron. In Great Britain the nineteenth century was characterized by increasing industrialization1 with greater dependence on the staple products of new countries for raw material and on the population of these countries for a market. Lumber, wheat, cotton, wool, and meat may be cited as examples of staple imports. In the United States2 the Civil War and railroad construction gave a direct stimulus to the iron and steel industry and hastened industrial and capitalistic growth. These two areas began to draw increasingly on outside areas for staples, and even the continental United States has found it necessary with the disappearance of free land, the decline of natural resources, and the demand for new industrial materials, notably rubber, to rely on outside areas as shown in her imperialistic policy of the twentieth century. Canada has participated in the industrial growth of the United States, becoming the gateway of that country to the markets of the British Empire. She has continued, however, chiefly as a producer of staples for the industrial centres of the United States and to a lesser degree those of Great Britain, making her own contribution to the industrial revolution of North America and Europe and being in turn tremendously influenced.

Notes [1] C.R. Fay, Great Britain: An Economic and Social Survey from Adam Smith to the Present Day (London, 1950). [2] See C. A. Beard and M. R. Beard, The Rise of American Civilization (New York, 1946).

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A Staple Theory of Economic Growth M.H. WATKINS The staple approach to the study of economic history is primarily a Canadian innovation; indeed, it is Canada's most distinctive contribution to political economy. It is undeveloped in any explicit form in most countries where the export sector of the economy is or was dominant.1 The specific terminology— staple or staples approach, or theory, or thesis—is Canadian, and the persistence with which the theory has been applied by Canadian social scientists and historians is unique. The leading innovator was the late Harold Innis in his brilliant pioneering historical studies, notably of the cod fisheries and the fur trade;2 others tilled the same vineyard3 but it is his work that has stamped the "school." His concern was with the general impact on the economy and society of staple production. His method was to cast the net widely. The staple approach became a unifying theme of diffuse application rather than an analytic tool fashioned for specific uses. There was little attempt to limit its application by the use of an explicit framework.4 Methodologically, Innis's staple approach was more technological history writ large than a theory of economic growth in the conventional sense.5 Once solidly entrenched in Canadian studies, the staple approach has now fallen on more uncertain days as its relevance has come to be questioned by Canadian economic historians.6 The strongest attack has come from Kenneth Buckley who maintains that it is "practical and efficacious" as a theory of economic growth to 1820, but that thereafter "other sources of national economic growth and change" are impossible to ignore; he concludes that Canadian economic historians should "replace the notion of an opportunity structure determined by geography and natural resources with a general concept of economic opportunity without specifying determinants."7 V.C. Fowke's emphasis on agriculture serving the domestic market as an impetus to investment and hence to economic growth in central Canada prior to Confederation involves a devaluation of the role of staple exports.8 W.T. Easterbrook has argued, after extensive review of the literature, that the staple theory no longer constitutes—and apparently ought not to—an adequate unifying theme for the study of Canadian development.9 On the other hand, H.G.J. Aitken has remained satisfied with the approach. His own recent writings have been focussed Source: M.H. Watkins "A Staple Theory of Economic Growth," Canadian Journal of Economics and Political Science (1963) 29: 141-158. Reprinted by permission of the publisher. Financial assistance for the summer of 1961 is gratefully acknowledged from the Ford Foundation. For helpful comments on earlier drafts of this paper, I am indebted to J.H. Dales, W.T. Easterbrook, J.I. McDonald, A. Rotstein, and S.G. TOantis of the University of Toronto and C.P. Kindleberger of the Massachusetts Institute of Technology.

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on the new resource industries of the twentieth century;10 in commenting on Buckley's paper he suggested that the staple approach was relevant at least to 1914,n and he has subsequently maintained that "it is still true that the pace of development in Canada is determined fundamentally by the exports that enable Canada to pay its way in the world."12 The sample is small, but so too is the number of practising Canadian economic historians. There would appear to be declining confidence in the relevance of the staple approach, especially if consideration is given to what has been said as well as what has been written. But, curiously, the decline has been paralleled by rising interest among non-Canadians who may or may not refer to Innis and Canada. The leading advocate of the staple approach today is D.C. North, whose work may well have set the stage for a reconsideration of the causes of American economic growth from the American Revolution to the Civil War.13 Two American economists, R.E. Caves and R.H. Holton, have critically reexamined the staple approach from the viewpoint of modern economic theory as a prelude to forecasting the state of the Canadian economy in 1970, and have given it a surprisingly clean bill of health.14 R.E. Baldwin has provided a brilliant theoretical article on the impact of staple production on an economy, and both North and Caves and Holton have acknowledged their indebtedness to him.15 Mention must also be made of the analytical approach used by J. V. Levin in his study of the role of primary product exports in Peru and Burma,16 of the implications for the staple approach of the application of modern income and growth theory to the classic problem of the transfer mechanism for capital imports in the Canadian balance of payments, particularly in the great boom before the World War I,17 and of the distinction made by H.S. Perloff and L. Wingo, Jr., between "good" and "bad" resource exports in the context of American regional growth.18 The simultaneous waning of the reputation of the staple approach among Canadians and its rise elsewhere has created a gap in the literature which this paper will attempt to bridge. It will argue that the staple theory can fruitfully be limited to a distinct type of economic growth; restate a staple theory so constrained in more rigorous form, primarily by drawing on the literature cited in the paragraph above; contrast this staple theory with other models of economic development; and finally, consider again the relevance of a staple approach to the Canadian case. I The linking of economic history and the theory of economic growth is a prerequisite to further advance in both fields. One obvious link lies in the development of theories appropriate to particular types of economic growth. The staple theory is presented here not as a general theory of economic growth, nor even a general theory about the growth of export-oriented economies, but rather as applicable to the atypical case of the new country.

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The phenomenon of the new country, of the "empty" land or region overrun by the white settlers in the past four centuries, is, of course, well known. The leading examples are the United States and the British dominions. These countries had two distinctive characteristics as they began their economic growth: a favourable labour/land ratio and an absence of inhibiting traditions.19 Prom these initial features flow some highly probable consequences for the growth process, at least in the early phase: staple exports are the leading sector, setting the pace for economic growth and leaving their peculiar imprint on economy and society; the importation of scarce factors of production is essential; and growth, if it is to be sustained, requires an ability to shift resources that may be hindered by excessive reliance on exports in general, and, in particular, on a small number of staple exports. These conditions and consequences are not customarily identified with underdeveloped countries, and hence are not the typical building blocks of a theory of economic growth. Rather, the theory derived from them is limited, but consciously so in order to cast light on a special type of economic growth. Because of the key role of staple exports it can be called a staple theory of economic growth. II The fundamental assumption of the staple theory is that staple exports are the leading sector of the economy and set the pace for economic growth. The limited—at first possibly nonexistent—domestic market, and the factor proportions—an abundance of land relative to labour and capital—create a comparative advantage in resource-intensive exports, or staples. Economic development will be a process of diversification around an export base. The central concept of a staple theory, therefore, is the spread effects of the export sector, that is, the impact of export activity on domestic economy and society. To construct a staple theory, then, it is necessary to classify these spread effects and indicate their determinants. Let us begin with the determinants. Assume to be given the resource base of the new country and the rest-of-the-world environment—the international demand for the supply of goods and factors, the international transportation and communication networks, the international power structure. The sole remaining determinant can then be isolated, namely, the character of the particular staple or staples being exported. A focus on the character of the staple distinguished Innis's work. C.R. Fay expressed the point most succinctly: ". . . the emphasis is on the commodity itself: its significance for policy; the tying in of one activity with another; the way in which a basic commodity sets the general pace, creates new activities and is itself strengthened or perhaps dethroned, by its own creation."20 The essence of the technique has been thrown into sharp relief by Baldwin. Using the method of ideal types, he contrasts the implications of reliance on a plantation crop and a family farm crop respectively for the economic development of an area exporting primary products. The important

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determinant is the technology of the industry, that is, the production function, which defines the degree of factor substitutability and the nature of returns to scale. With the production function specified and the necessary ceteris paribus assumptions—including the demand for goods and the supply of factors—a number of things follow: demand for factors; demand for intermediate inputs; possibility of further processing; and the distribution of income. These determine the range of investment opportunities in domestic markets, or the extent of diversification around the export base. If the demand for the export staple increases, the quantity supplied by the new country will increase. This export expansion means a rise in income in the export sector. The spending of this income generates investment opportunities in other sectors, both at home and abroad. By classifying these income flows, we can state the staple theory in the form of a disaggregated multiplier-accelerator mechanism. In A.C. Hirschman's terms, the inducement to domestic investment resulting from the increased activity of the export sector can be broken down into three linkage effects: backward linkage, forward linkage, and what we shall call final demand linkage.21 The staple theory then becomes a theory of capital formation; the suggestion has been made but not yet elaborated that it is such. Backward linkage is a measure of the inducement to invest in the homeproduction of inputs, including capital goods, for the expanding export sector. The export good's production function and the relative prices of inputs will determine the types and quantities of inputs required. Diversification will be the greatest where the input requirements involve resources and technologies which permit of home-production. The emphasis usually placed in studies of economic development on barriers to entry into machinery production suggests a high import content for capital-intensive staples, and hence a small backward linkage effect. Caves and Holton, however, emphasize the importance of capital-intensive agriculture in supplying linkage to domestic agricultural machinery production. Theory and history suggest that the most important example of backward linkage is the building of transportation systems for collection of the staple, for that can have further and powerful spread effects. Forward linkage is a measure of the inducement to invest in industries using the output of the export industry as an input. The most obvious, and typically most important, example is the increasing value added in the export sector; the economic possibilities of further processing and the nature of foreign tariffs will be the prime determinants. Final demand linkage is a measure of the inducement to invest in domestic industries producing consumer goods for factors in the export sector. Its prime determinant is the size of the domestic market, which is in turn dependent on the level of income—aggregate and average—and its distribution. The size of the aggregate income will vary directly with the absolute size of the export sector. But a portion of the income may be received by what

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Levin has called "foreign factors"—factors which remit their income abroad— rather than "domestic factors." To the extent that income received by foreign factors is not taxed away domestically, final demand linkage will be lessened. The servicing of capital imports is a case in point. Primary producers are notoriously susceptible to indebtedness, and the burden will be greater the more capital-intensive the staple. Leakage can also result from wages paid to migratory labour and from immigrants' remittances. The average level of income, that is, the per capita income of the domestic factors, depends on the productivity of "land" or the resource content of the staple export, for other factors are importable. The distribution of income, on present assumptions, is determined by the nature of the production function of the staple, in Baldwin's models being relatively unequal for the plantation crop and relatively equal for the family farm crop. The impact of these two market dimensions on final demand linkage can be seen by classifying consumer spending in two ways. Firstly, consumer spending may be either on home-produced goods or on imports, and the higher the marginal propensity to import the lower the final demand linkage. Secondly, it may be either on subsistence goods and luxuries, or on a broad range of goods and services; the latter are more likely to lend themselves to those economies of mass production which lie at the heart of ongoing industrialization, while luxury spending—other than for labour-intensive services—is likely, given the tendency to ape the tastes of more advanced countries, to be directed towards imported goods, that is, to create in Levin's terminology "luxury importers." Final demand linkage will tend to be higher, the higher the average level of income and the more equal its distribution. At a higher level of income, consumers are likely to be able to buy a range of goods and services which lend themselves to domestic production by advanced industrial techniques. Where the distribution is relatively unequal, the demand will be for subsistence goods at the lower end of the income scale and for luxuries at the upper end. The more equal the distribution the less the likelihood of opulent luxury imports and the greater the likelihood of a broadly based market for mass-produced goods. The discussion of the linkages so far has assumed that investment is induced solely by demand factors. But on the supply side the expansion of the export sector creates opportunities for domestic investment which may or may not be exploited. Consideration must be given to the relationship between staple production and the supply of entrepreneurship and complementary inputs, including technology, The key factor is entrepreneurship, the ability to perceive and exploit market opportunities. Entrepreneurial functions can be fulfilled by foreigners, and to the extent that this makes available technical and marketing skills the result can be advantageous to the new country. But the literature on economic development, and particularly on the dual economy, raises many doubts as to

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the adequacy of foreign entrepreneurship. It may flow freely into the export and import trades, but -fail to exploit domestic opportunities. Exports may be regarded as safer, in part because they earn directly the foreign exchange necessary to reimburse foreign factors, but largely because export markets are better organized and better known than domestic markets. Foreign domination of entrepreneurship may militate against its general diffusion. An adequate supply of domestic entrepreneurship, both private and governmental, is crucial. Its existence depends on the institutions and values of society, about which economists generalize at their peril. But the character of the staple is clearly relevant. Consider, for example, Baldwin's polar cases. In the plantation case, the dominant group with its rentier mentality on the one hand, and the mass of slaves who are prevented from bettering themselves on the other, can produce a set of institutions as inimical to entrepreneurial activity as is to be found in any tradition-ridden society. Business pursuits may be castigated as "money grubbing"; education—which, as North has emphasized, is very important—is likely to be confined to the elite and to slight the development of technical and business skills; political activity tends to be devoted to the defence of the status quo. On the other hand, in the family-farm case, as in wheat areas, the more equal distribution of income can result in attitudes towards social mobility, business activities, education, and the role of government which are more favourable to diversified domestic growth. These are gross differences; the more subtle ones could be worked out for specific staples. Even where domestic entrepreneurship is forthcoming, its effectiveness rests on the availability of labour and capital, both foreign and domestic. The "push" from the old countries has in the past created a highly elastic supply of labour, although not, as the slave trade attests, without some resort to the use of force. But the individual receiving country has to create conditions sufficiently favourable to the inflow of labour to compete with other receiving countries. The original staple may create a social structure which is unattractive to the immigrant with skills suitable for the development of domestic economic activity. Where the staple is land-intensive, as is fur, the staple producers may find it in their own self-interest to discourage immigration and settlement. The transport technologies associated with particular staples provide varying passenger fares and hence differential stimuli to immigration. The availability of labour domestically will depend on the competing attractions of staple production and the quality of the labour force that has resulted from the exploitation of the particular staple. The staple activity may attract excess labour through nonpecuniary advantages: the romantic life of the fur trader and the aristocratic life of the planter are frequently alleged to have had detrimental consequences for other sectors of the economy. The quality of the labour force is significantly related to education.

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Foreign capital, both in substance and in preference for foreign trade over domestic industry, is difficult to distinguish from foreign entrepreneurship, which we have already discussed. The availability of capital domestically will depend on the extent of domestic saving and the biases of the savers in placing their funds. The amount of saving will be determined by the production function for the staple. For example, Baldwin argues that savings will be higher with the skewed income distribution of the plantation crop than with the equal distribution of the family-farm crop. This would be the conventional view, although the opposite would be true if it were assumed that saving was encouraged by greater investment opportunities at home or discouraged by a greater concern with consumption for status in a more hierarchical society. But the amount of saving may not matter greatly. For domestic savers, like foreign capitalists, may be biased against domestic activities; they may prefer to expand the export industry further or to invest in the import trade. They may also prefer to invest abroad, for in an open economy capital can flow out as well as in. It is only when there are abundant opportunities in domestic markets waiting to be exploited that the amount of domestic saving will significantly determine the rate of investment. The technology applied in domestic sectors is likely, to the extent that it is up to date, to be substantially borrowed from abroad. The newness of the country will minimize the difficulties of adapting borrowed technology and create a potential minimum growth rate not significantly lower than that achieved by advanced economies. The inflow of foreign technology will be facilitated by the inflow of foreign entrepreneurship and capital. To the extent that innovation is necessary and possible in the export sector, confidence may be gained by domestic entrepreneurs which will facilitate creative responses in domestic sectors. As domestic entrepreneurship emerges, innovations should become more appropriate to domestic factor proportions and the requirements of the domestic market. A historically relevant theory must allow not only for the differing character of particular staples but also for the impact of the resource base of the new country and the international environment. For any particular new country the initial conditions can vary, and these conditions can change over time, both autonomously and as a result of the actions of the new country consequent on its success in exploiting its particular staple or staples. Although these points are important, it is difficult to say much in general about them. For any given inducement to invest offered by the market, an appropriate resource base is necessary; the best of all possible staples will do little to encourage development if the resource base is sufficiently bad, and the impact of a particular staple can vary widely depending on the resource base of the particular country.22 The resource base itself can change through discovery, and success in staple production, at least for some staples, may expedite the process.23

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So too the international environment can vary in its suitability for the development of new countries. Staple producers begin as colonial outposts of old countries and differences among the latter—in their markets for staples, their supplies of factors for export, their institutions and values, and their colonial policies—will affect growth prospects. Change can take place in any of these dimensions: in foreign demand and foreign supply, which can destroy old staples and create new ones; in transportation facilities, which can cheapen internationally traded goods; in the "push" of factors from the old countries and the "pull" from other new countries; in colonial policy and in the frequency of wars, which can either encourage or discourage growth. And the new country, to the extent that it is successful, may gain power to mould the environment to suit its needs. It can develop a transportation system adequate for both domestic and export requirements; it can pursue a commercial policy by which it can cause further processing of its exports and promote importcompeting industry without unduly interfering with the optimal allocation of its resources. What is the likely growth path of a staple economy? Growth is initiated by an increase in demand for a staple export. If the spread effects are potent, as the export sector grows so too will the domestic sectors. The result will be increasing demand for factors. Domestic slack, if it exists at all, will be quickly absorbed, and the continuation of growth will depend on the ability to import scarce factors. If the supply of foreign factors is elastic, the customary tendency for the expansion of one sector—in this case exports—to affect domestic sectors adversely by driving up factor prices is mitigated. This explains the very strong booms that are a feature of growth in staple economies.24 But what of the nature of growth in the long run? In a staple economy, as in any other, sustained growth requires an ability to shift resources at the dictates of the market—what C.P. Kindleberger calls "a capacity to transform." Particular export lines can create prosperity, but typically only for a short time. Over the longer pull they cease to be profitable either because of diminishing returns on the supply side, or adverse shifts in demand consequent on competition from cheaper sources of supply or from synthetics, or because of the income inelasticity of foreign demand, or simply because of changes of taste. This tendency can be slowed up by attempts to improve marketing and by seeking out cost-reducing innovations. The possibility of the latter depends on the character of the staple; for example, because of the physical properties of the plants, cotton production was historically much more resistant to mechanization than wheat growing. But the law of diminishing returns cannot be checked indefinitely. Sustained growth, then, requires resource flexibility and innovation sufficient to permit shifts into new export lines or into production for the domestic market. The probability of long-run success for the staple economy is significantly increased by its two distinctive initial features: a favourable labour/land ratio

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and an absence of inhibiting traditions. The first implies a relatively high standard of living which facilitates expanding domestic markets and substantial factor mobility. The fact that new countries do not start their development with population pressing against scarce resources gives them an enormous advantage over the typical underdeveloped country. Specifically, they have neither a large subsistence agricultural sector severely limiting markets for domestic industry, nor a pool of cheap labour permitting industrialization to proceed with only limited impact on the incomes of much of the population. Subsequent population growth, in part by immigration, means that the size of population is closely related to economic opportunity at a relatively high standard of living. The second feature, the lack of traditions, means that institutions and values must be formed anew, and although there will be a substantial carry-over from the old countries, the process will be selective and those transferred are likely to take a form more favourable to economic growth. These are substantial advantages and go far to explain the extraordinary success of some new countries. But even for the staple economy, historians have insisted that the process of growth is not without pitfalls. It is frequently alleged, at least implicitly, that the achievement of a high level of national income masks deficiencies in the structural balance of the economy. W.W. Rostow charges that the high levels of welfare achieved in new countries by exploiting land and natural resources will delay their reaching the "take-off" stage.25 If the concept of take-off is interpreted as meaning simply the growth and diversification of the manufacturing sector, this argument runs counter to the staple theory. Rostow's claim, however, is no more than an untested hypothesis. He has not outlined the specific mechanism by which primary exports delay industrialization. It is not clear that he is saying anything more than that if a country has a comparative advantage in primary exports it will perforce have a comparative disadvantage in manufactures. This static view communicates nothing about the process of growth in a world where factor supply can be highly elastic and the composition of imports can shift radically over time. The first peril, then, is illusory.26 A more real difficulty is that the staple exporters—specifically, those exercising political control—will develop an inhibiting "export mentality," resulting in an overconcentration of resources in the export sector and a reluctance to promote domestic development. Our previous comments on the social and political structure associated with particular staples are relevant here, but the literature on economic development in general is replete with other hypotheses and examples. Easterbrook, developing a theme of Innis's, has commented that bureaucratic institutions concerned with "playing it safe" tend to emerge in the face of the initial uncertainties of a marginal status and then to persist.27 In the Cuban case, H.C. Wallich emphasizes the importance of the "sugar mentality" which "gives sugar an economic and political dominance even greater than its true weight in the economy."28 H.W. Singer has pointed out that, when

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export earnings axe high, the country is able to finance development but lacks the incentive to do so; when the earnings are low, the incentive exists but the means are lacking.^ In Canada, there is evidence of a boom-and-bust psychology; excessive optimism causes booms to proceed beyond their proper limits,30 while depressions are met by resort to tariffs which are "second best" in the short run and probably, inappropriate in the long run and which persist once introduced.31 One is led to conclude that staple economies are often believed to be much more at the mercy of destiny than they actually are. As Levin has demonstrated in his study of Burma, planning can alter income flows, thereby strengthening linkages and increasing domestic investment. The serious pitfall is that the economy may get caught in a "staple trap." Sustained growth requires the capacity to shift attention to new foreign or domestic markets. The former requires a favourable combination of external demand and available resources. The latter requires a population base and level of per capita income that permit taking advantage of the economies of scale in modern industrialism. Both require institutions and values consistent with transformation, and that requires the good fortune of having avoided specialization in the wrong kind of staple, such as Baldwin's plantation crop. If the staple is unfavourable or if stagnation persists for any extended period because of a weak resource base, the staple economy can take on the character of the traditional underdeveloped country in both respects stressed by Rostow. Firstly, institutions and values can emerge which are inimical to sustained growth, and the process of remoulding will be difficult. Secondly, a population problem can be encountered as the population initially established through immigration continues to expand through natural increase. Persistent unemployment and underemployment will become characteristic of the economy. Immigration may be replaced by emigration, as resort is had to the Irish solution. In the absence of alternative opportunities, factors will tend to accumulate excessively in the export sector or in subsistence agriculture. In the former case, growth may become "immiserized" as the terms of trade turn against the country.32 In the latter, the economy will face a problem common to most underdeveloped countries: development will depend on the interdependent growth of agriculture and industry. In any event, the initial opportunities for easy growth will no longer exist. If the pitfalls are avoided—if the staple or staples generate strong linkage effects which are adequately exploited—then eventually the economy will grow and diversify to the point where the appellation "staple economy" will no longer suffice. Population growth will come to result more from natural increase than from immigration. Per capita income will rise beyond the level consistent with any customary definition of underdevelopment. With the gaining of entrepreneurial confidence and the expanding opportunities of domestic markets, domestic entrepreneurs will persistently usurp markets from foreign suppliers.33 A well-developed secondary manufacturing sector serving domes-

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tic markets and possibly even foreign markets will emerge. Staple exports and imports of manufactured goods may fall as a percentage of national income. If "land" remains relatively abundant, this may not happen; that should not be taken as proof of backwardness, however, for it may be no more than the momentary outcome of the operation of the law of comparative advantage. Ill We have taken pains throughout to emphasize the special character of the staple theory. Consideration of the range of relationships possible between foreign trade and economic development will underline the point. In a recent synthesis of the literature, Kindleberger has put forth three models relating foreign trade and economic development; these cover cases where foreign trade is, respectively, a leading, a lagging, and a balancing sector of the economy.34 In the model in which it leads, autonomous foreign demand, typically accompanied by technological change in the developing country, sets the pace, and economic development is a process of diversification around an export base. The staple economy is clearly a special case of this model. In the model in which foreign trade lags, domestic investment leads, tending to create pressure on the balance of payments which is met by importsubstitution. A large number of underdeveloped countries believe that this is the relevant model. The restrictive nature of the commercial policy of developed countries, combined with the tendency for import demand to expand more rapidly than income in the early stages of development—chiefly because of the need to import capital goods and possibly also industrial raw materials and food—lend credence to this belief. The contrast between the leading and lagging models is that between development based on trade-expansion and development based on trade-contraction. The model in which foreign trade is the balancing sector covers the case of trade-expansion which is not demand-led, but rather based on autonomous supply pushes in the export sector. It applies to the case where domestic investment leads, creating balance of payments difficulties which are met by pushing exports rather than by limiting imports. A trade pattern based on exporting manufactures, in order to import food and take the strain off domestic agriculture, has been espoused by both W.A. Lewis and the late R. Nurkse, and is a particular version of the balancing case.35 Kindleberger's classification applies to countries already in the process of development. The limitations of the staple theory emerge most clearly when we consider the case where export production is superimposed on a preexisting subsistence economy. For the staple economy, the export sector can be an engine of growth; for the subsistence economy, the consensus appears to be that the export sector will have either limited or adverse effects on the economy. The linkage effects are likely to be slight, regardless of the character of the export good, because of the internal structure of the underdeveloped country, including the existence of noncompeting groups in the domestic and foreign

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sectors.36 Even where groups are competing, if there is disguised unemployment in the subsistence sector, increases in productivity in the export industry will not bring increases in real wages; these depend on raising productivity in the subsistence sector and to this exports make little or no contribution.37 The country might have been better off if it had never exported in the first place. Growth may have become immiserized, as was previously noted. Domestic factors may have been drawn into export production when they could have been more productively applied to domestic manufacture.38 Investments made complementary to the export sector may generate pecuniary external economies which excessively encourage primary export production.39 Imports which flood in as a result of exporting may destroy existing handicraft production, and if the export sector does not absorb the labour which is displaced, the gains from trade may be negative.40 If exports and domestic investment compete for available saving, then a rise in the export volume can directly reduce the rate of growth of income.41 IV The closeness of the link between the staple approach and Canadian historical research makes it unlikely that the application of a more explicit theory will add much to our understanding of Canadian economic development. Nevertheless, a few comments are in order, both to clear up some specific ambiguities and to resolve the issue of the relevance of the staple theory to Canada's economic development, past and present. 1. The cod fisheries and the fur trade were clearly the leading sectors of the early period. Neither staple required much permanent settlement, although as the fur trade came to rely less on the Indian and penetrated further west and as the cod fisheries shifted from the green cure to the dry cure—an example of forward linkage—the impetus to settlement increased. In New Prance the distribution of income consequent on the fur trade may have been such as to lower final demand linkage—although it would hardly bear comparison with that resulting from a plantation crop—and the aristocracy may have been as much feudal as bourgeois in its attitudes, although the drive of individuals such as J. Talon should not be forgotten. But neither the character of the staple nor the Prenchness of the colony explain the slow growth relative to the American colonies. Rather, what is fundamental was poor location compared with New England for supplying the West Indies7 market. This limited the diversity of exports and thus retarded the development of commercial agriculture, lumbering, and above all the carrying trade and shipbuilding, which were then the keys to development. A small population base, established more for reasons of imperial design than of economics per se, grew rapidly by natural increase. In the face of limited economic opportunities, labour accumulated in subsistence agriculture and New France came to approximate the dual economy, with a compact agricultural community of habitants and the moving frontier of the fur traders, which had only limited contacts one with another.42 By the time

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of the Conquest the colony had clearly taken on some of the colouration of an old society and was partly ensnared in the staple trap. In the Atlantic colonies, New England's success in developing an aggressive commercial economy around the fisheries shows that the character of cod as a staple can hardly explain the slow growth of Nova Scotia and Newfoundland. Rather, proximity to the markets of the West Indies and southern mainland colonies and, to a lesser extent, good agricultural land and the possibility of a winter fishery, were the prerequisites that were lacking. The effects of a poor location and a weak resource base—the latter being particularly applicable to Newfoundland—were intensified by the frequency of imperial conflict and the commercial and military aggressiveness of New England. The result militated against either England or France taking the effort that was necessary to create an environment favourable to further development. The area was not so much trapped as buffeted about and ignored. Absence of economic opportunity because of geographic factors was the crucial constraint on both continental and maritime developments. Innis's method has obscured this point and has led to exaggerated emphasis on the character of the staples, particularly of fur. But if the nature of the staples is insufficient to explain the absence of rapid growth, lack of diversified development imprints more clearly the character of those staples around which some success is found and increases the probability that their peculiar biases will persist in institutions and values. Thus, with fur came the life of the habitant and the vision of a centralized transcontinental economy; with cod, parochialism and a commitment to the sea. 2. Fowke has argued that commercial agriculture in Upper Canada rose above the subsistence level prior to the 1840s in the absence of substantial external demand. Although allowance must be made for "shanty demand" linked to timber exports, the point is conceded, and with it the implication that some growth is possible without exports as the leading sector. But the quality of the growth that took place was unimpressive. The census of 1851 shows industrial development to be confined to flourmills and sawmills, both of which were on an export basis, and to the small-scale production of the simpler types of manufacture for the local market.43 The population and income levels that had been attained were not sufficient to sustain a large or technologically sophisticated manufacturing sector. Buckley rightly insists that the economy became more complex after 1820 and that the range of economic opportunity widened, but this does not mean that staple exports ceased to be of critical importance. 3. One of Buckley's criticisms of the staple approach is its tendency "to ignore any section once the staple which created or supported it is no longer expanding," and he cites as an example the slighting of Quebec's economic development since the decline of the fur trade.44 His point has some validity, at least so far as Quebec is concerned, but the neglect is not inherent in a properly

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stated staple theory of economic growth. As the new country (or region) ages, whether it be successful or unsuccessful, it takes on the character of an old country and becomes amenable to analysis as such. In Quebec in the nineteenth century, it is clear that the expansion of timber and ships as staple exports, the entrepreneurial drive and accumulated capital of the English commercial class carried over from the fur trade, and emigration which relieved the pressure of population on scarce resources combined to lessen the probability that the region would become too deeply enmeshed in the staple trap. Nevertheless, it is the interrelationship between agriculture and industry in the context of a rapidly growing population that should be made the focus of study, as one would expect to be done for any presently underdeveloped country. Statistics on the relative rates of growth of Ontario and Quebec indicate, incidentally, that if one gives credence to the alleged anti-commercial attitudes of the French Canadian, then, given the less favourable labour/land ratio Quebec inherited from New France, what needs to be explained is the remarkable success of Quebec. 4. The period of Canadian economic history on which most controversy has focused recently has been the "Great Depression" of 1873-96. So long as it could be properly regarded as a great depression, it was amenable to the staple approach. Its bad reputation was based on the slow growth of population and persistent emigration, and this could be linked to the failure of the western wheat economy to expand in a sustained fashion in the face of a trend decline in the world price of wheat. The absence of rapid extensive growth made it possible for the period to be passed over quickly in the history books, and to be remembered more for the attempts that were made to promote development than for the actual growth achieved. Recent research, however, particularly the statistical work of O.J. Firestone, D.M. McDougall, P. Hartland, and G.W. Bertram,45 makes it impossible to continue to regard these years as a great depression; they witnessed, in fact, an impressive increase in real per capita income, comparable with that in the United States, considerable industrial expansion, and substantial capital inflow. The growth in real income can be attributed partly to the export sector. Exports did fall as a percentage of national income, Nevertheless, the real value of exports grew absolutely; there were important shifts in the composition of exports which generated new investment, from wood products to agriculture, and within the latter, from grain to animal products, with cattle and cheese emerging as the new staples; probably exports became more highly manufactured—the growth of cheese factories is striking—and more capitalintensive; railway building provided an important stimulus to growth and its primum causum was the expectation of large exports of western grain. Exports, then, continued to play their conventional role as a leading sector. They can hardly be given full credit, however, for the increase in real income of this period. Factor increments shifted from export markets

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to domestic markets with a success inconsistent with a markedly backward economy. Yet the extent to which the adaptation was made to a declining stimulus from the export sector should not be exaggerated. The decade rates of growth of manufacturing after 1870 are not comparable with those of the first decade of the twentieth century when exports were expanding rapidly, and at the end of the century Canadian industry was still backward relative to that of such countries as Britain, the United States, and Germany. There was substantial net emigration in every decade from 1861 to 1901. The Canadian economy was not growing fast enough to generate employment opportunities for increments to the labour force by natural increase; while this may be no cause for concern from an international perspective, contemporary political debate and newspaper comment leaves no doubt that Canadians regarded this steady outflow of population as evidence of an unsatisfactory performance by the economy. 5. A restatement of the staple theory might be expected to cast new light on the hoary issue of the long-run impact of the Canadian tariff. A conventional argument has been that the tariff permanently increases population because export industries are less labour-intensive than import-competing industries.46 J.H. Young would appear to have effectively disposed of this line of reasoning,47 but there may be some validity to the population-sustaining argument for a tariff if one looks at its effect in a boom period, such as 1896 to 1913. It is clear that, by reducing the marginal propensity to import, the tariff increases employment in import-competing industries. At the same time, the fact that factors are in highly elastic supply limits the extent to which costs rise for the export industries, while the sheer strength of the boom, which is being further increased by investment in import-competing industries, keeps imports high in spite of the tariff, thus tending to eliminate foreign repercussion. The tariff would appear to increase employment opportunities, and thereby the population-sustaining capacity of the economy. If, as is probable, the infant industry argument is not valid, however, then the real income has been lowered. We return to the customary view that the Canadian tariff has increased population while lowering real income. But there is an important qualification, as a result of which population may not be increased in the long run. The tariff will tend to strengthen a boom which is already excessive and thus to increase the problems of readjustment that have to be faced eventually. To the extent that these problems are not otherwise solved, emigration to the United States with its higher wages is likely to be greater than it would have been in the absence of the tariff. 6. The period 1896 to 1913 was undeniably an example of a classic staple boom. But the industrial development which was achieved in its wake so increased the complexity of the Canadian economy as to make it impossible to continue to use staple industries as the unifying theme of economic growth, or so the implicit reasoning seems to run in the best of the textbooks.48 The

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notion of a discontinuity in Canadian economic development in the early twentieth century, though superficially attractive, is difficult to maintain as Caves and Holton have demonstrated. The manufacturing sector appears to have been filling in slowly over a long period of time, without passing through any critical stage of economic maturity. Patterns of short-run change consistent with the staple theory are to be found in all three periods of rapid growth in this century, 1900-1913, 1920-1929, and 1946-1956: the rate of investment closely reflects the demand for exports, current and prospective; production for domestic markets expands around the export-base, replacing imports; excessive optimism leads to over-expansion in the export sector and complicates the subsequent problems of readjustment; and the quantity of saving adjusts itself to investment demand, in part by inducing capital imports. Is the staple theory, then, relevant to Canada today, or has it been long irrelevant? Does the evidence adduced by Caves and Holton on the common character of growth patterns in the twentieth century, which could be extended to include the boom of the 1850s, reflect historical necessity or historical accident? Is Canada unable to grow at a satisfactory rate unless exports lead, or able to do so but relieved of the necessity until now by good luck? There is no doubt that luck is a neglected factor in Canadian economic history. Nevertheless, the fundamental fact is the pervasive interdependence with the North Atlantic community, and particularly with the United States. Canada is a small and open economy, a marginal area responding to the exogenous impact of the international economy. The basic determinants of Canadian growth are the volume and character of its staple exports and the ability to borrow, adapt, and marginally supplement foreign technology. These guarantee for Canada a minimum rate of growth that cannot diverge too widely from that achieved elsewhere, particularly in the United States. They create no assurance, however, of a rate of growth sufficient to maintain full employment, even if the expansion of the labour force be limited to natural increase. The probability that borrowed technology and staple exports will provide a sufficient impetus to the economy has diminished as staples have become more capital-intensive. That expanding exports and satisfactory economic growth have been correlated in the past is clear. How this is interpreted depends on a judgment as to the freedom of action that Canada possesses. The emphasis increasingly placed by economists on the link between the inefficiency of Canadian secondary manufacturing industry and the Canadian tariff49 suggests that the major difficulty is an inhibiting export mentality, the elimination of which lies within Canadian control. Prom this point of view, economic institutions and political values, an inefficient structure of industry combined with an unwillingness to do anything about it, have in the past prevented Canada from growing at a satisfactory rate in the absence of a strong lead from primary exports, but this need not be true for the indefinite future.

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Notes [1] The American economic historian, G.S. Callender, however, devoted considerable attention to the importance of international and interregional trade in staples in the United States, an aspect of American growth which has been much neglected but has recently been revived by D.C. North. See Callender, Selections from the Economic History of the United States, 1765-1860 (Boston, 1909); and North, The Economic Growth of the United States, 1790-1860 (Englewood Cliffs, N.J., 1961). [2] See H.A. Innis, The Fur Trade in Canada: An Introduction to Canadian Economic History (Toronto, 1930; 2nded., 1956); The Cod Fisheries: The History of an International Economy (Toronto, 1940; 2nd ed., 1954). For a collection of Innis's writings in the Canadian field, see Essays in Canadian Economic History (Toronto, 1957). For a complete bibliography of his writings, see J. Ward, "The Published Works of H.A. Innis" Canadian Journal of Economics and Political Science [CJEPS] (1953) 19:236-44. [3] W.A. Mackintosh is sometimes given credit as a co-founder of the staple theory; see his "Economic Factors in Canadian History," Canadian Historical Review (1923) 4:12-25; and "Some Aspects of a Pioneer Economy," CJEPS (1936) 2:457-63. [4] This point has often been noted; see, for example, R.E. Caves and R.H. Holton, The Canadian Economy: Prospect and Retrospect (Cambridge, Mass., 1959), 30; and W.T. Easterbrook "Problems in the Relationship of Communication and Economic History," Journal of Economic History (1960) 20:563. [5] K. A.H. Buckley makes this point strongly; see his "The Role of Staple Industries in Canada's Economic Development," Journal of Economic History (1958) 18:442. [6] For its use in communications study—where, following the later Innis, the media become the resource or staple—see M. McLuhan "Effects of the Improvements of Communication Media," Journal of Economic History (1960) 20:566-75; and The Gutenberg Galaxy (Toronto, 1962), particularly 164-6. [7] Buckley, "Role of Staple Industries," 444, 445. [8] V.C. Fowke, The National Policy and the Wheat Economy (Toronto, 1957), 2. [9] W.T. Easterbrook, "Trends in Canadian Economic Thought," South Atlantic Quarterly (1959) 58:91-107; and "Recent Contributions to Economic History: Canada," Journal of Economic History (1959) 19:76-102. [10] H.G.J. Aitken, "The Changing Structure of the Canadian Economy" in Aitken and others, The American Economic Impact on Canada (Durham,

36

[11] [12] [13]

[14] [15] [16] [17]

[18]

[19]

[20]

[21] [22]

M.H. Watkins N.C., 1959), and American Capital and Canadian Resources (Cambridge, Mass., 1969). H.G.J. Aitken, "Discussion," Journal of Economic History (1958) 18:451. Aitken, American Capital and Canadian Resources, 74. B.C. North, "Location Theory and Regional Economic Growth," Journal of Political Economy (1955) 62:243-58; "International Capital Flows and the Development of the American West," Journal of Economic History (1956) 16:493-505; "A Note on Professor Rostow's Take-off' into Selfsustained Growth," Manchester School of Economic and Social Studies (1958) 26:68-75; "Agriculture and Regional Economic Growth," Journal of Farm Economics (1959) 41:943-51; and The Economic Growth of the United States, 1790-1860. Caves and Holton, The Canadian Economy, p.l. R.E. Baldwin, "Patterns of Development in Newly Settled Regions," Manchester School of Economic and Social Studies (May, 1956) 14:16179. J.V. Levin, The Export Economies: Their Pattern of Development in Historical Perspective (Cambridge, Mass., 1960). G.M. Meir, "Economic Development and the Transfer Mechanism: Canada, 1895-1913," CJEPS (1953) 19:1-19; J.C. Ingram "Growth and Canada's Balance of Payments," American Economic Review (1957) 47:93-104; and J.A. Stovel, Canada in the World Economy (Cambridge, Mass., 1959). H.S. Perloff and L. Wingo,Jr., "Natural Resource Endowment and Regional Economic Growth" in J.J. Spengler, ed., Natural Resources and Economic Growth (Washington, 1961), 191-212; this article draws on H.S. Perloff; E.S. Dunn, Jr.; E.E. Lampard; and R.F. Muth in Regions, Resources and Economic Growth (Baltimore, 1960). Both features are recognized by W.W. Rostow in The United States in the World Arena (New York, 1960), 6; the first is also cited by B.F. Hoselitz, "Patterns of Economic Growth," CJEPS (1955) 21:416-31. C.E. Fay, "The Toronto School of Economic History," Economic History (Jan. 1934) 3:168-71. See also Easterbrook, "Problems in the Relationship of Communication and Economic History," 563. A.O. Hirschman, The Strategy of Economic Development (New Haven, 1958) 6. North's book supra, note [1] is weakened by his failure adequately to appreciate the importance of the resource base. He applies Baldwin's polar cases to the American South and West in the period prior to the Civil War,

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but has probably exaggerated their efficacy in explaining rates and types of development by understating differences in the general resource base which favoured the West. [23] Note the Canadian mineral discoveries consequent on railway building and hence linked ultimately to the development of the western wheat economy. [24] On external diseconomies generated by an expanding sector when factor supplies are inelastic, see M. Fleming, "External Economies and the Doctrine of Balanced Growth," Economic Journal (1955) 65:241-56. On the character of export-led booms in Canada, see the literature cited in n. 17. [25] W.W. Rostow, The Stages of Economic Growth (Cambridge, Mass., 1960), 36. [26] North, after appeal to the American case, reaches a similar conclusion, supra, note [1]. [27] See W.T. Easterbrook, "The Climate of Enterprise" American Economic Review (1949) 39:322-35; "Uncertainty and Economic Change," Journal of Economic History (1954) 14:346-60; and "Long Period Comparative Study: Some Historical Cases," Journal of Economic History (1957) 17:571-95. [28] H.C. Wallich, Monetary Problems of an Export Economy (Cambridge, Mass., 1960), 12. [29] H.W. Singer, "The Distribution of Gains between Investing and Borrowing Countries," American Economic Review (1950) 40:482. [30] The classic example is the building of two additional transcontinental railways during the wheat boom, 1896-1913. The general phenomenon is noted by A.F.W. Plumptre, "The Nature of Economic Development in the British Dominions," CJEPS (1937) 3:489-507. [31] The high correlation between depressions and tariff increases is noted by J.H. Young, Canadian Commercial Policy, a study done for the Royal Commission on Canada's Economic Prospects (Ottawa, 1957). [32] For a formal presentation of the theory of immiserizing growth, see J. Bhagwati, "Immiserizing Growth: A Geometric Note," Review of Economic Studies (1958) 25:201-5; and "International Trade and Economic Expansion," American Economic Review (1958) 48:941-53. [33] This mechanism has recently been emphasized by Hirschman, The Strategy of Economic Development, 120ff. [34] C.P. Kindleberger, Economic Development (New York, 1958), 14. [35] W.A. Lewis, The Theory of Economic Growth (Homewood, 111., 1955); and R. Nurkse, Patterns of Trade Development, Wicksell Lectures, 1959 (Stockholm, 1959).

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[36] H. Myint, "The Gains from International IVade and the Backward Countries," Review of Economic Studies (1954-55) 22:129-42. [37] W.A. Lewis, "Economic Development with Unlimited Supplies of Labour," Manchester School (1954) 22:139-41. [38] Singer, "The Distribution of Gains." [39] Lewis, The Theory of Economic Growth, 348. [40] G. Haberler provides a geometric demonstration of a case where free trade is harmful, given rigid factor prices. "Some Problems in the Pure Theory of International Trade," Economic Journal (1950) 60:223-40. The argument is extended in S.B. Linger, An Essay on Trade and Transformation (New York, Stockholm, 1961), 2. [41] R.J. Ball, "Capital Imports and Economic Development: Paradoxy or Orthodoxy," Kyklos (1962) 15:610-23. [42] D. Gerhard, "The Frontier in Comparative View," Comparative Studies in History and Society (1959) 1:205-29. [43] O.J. Firestone, "Development of Canada's Economy, 1850-1890" in Trends in the American Economy in the Nineteenth Century (Princeton, 1960), 217-52. [44] Buckley, "The Role of Staple Industries," 447. [45] O.J. Firestone, Canada's Economic Development, 1867-1953 (London, 1958), and "Development of Canada's Economy, 1850-1900"; D.M. McDougall, "Immigration into Canada, 1851-1920," CJEPS (1961) 27:16275; P. Hartland, "Canadian Balance of Payments since 1868," in Trends in the American Economy in the Nineteenth Century, 717-55; G.W. Bertram, "Historical Statistics on Growth and Structure of Manufacturing in Canada, 1870-1957," Canadian Political Science Association Conference on Statistics, June 10-11, 1962. [46] W.A. Mackintosh, The Economic Background of Dominion-Provincial Relations, A Study Prepared for the Royal Commission on DominionProvincial Relations (Ottawa, 1939; reprint Carleton Library, 1964), 140ff; and C.L. Barber, "Canadian Tariff Policy," CJEPS (1955) 21:513-30. [47] Young, Canadian Commercial Policy, 89fF. [48] W.T. Easterbrook and H.G.J. Aitken Canadian Economic History (Toronto, 1956). [49] See H.E. English, "The Role of International Trade in Canadian Economic Development since the 1920V (Ph.D. thesis, University of California, 1957); S. Stykolt and H.C. Eastman, "A Model for the Study of Protected Oligopolies," Economic Journal (1960) 70:336-47; R. Dehem, "The Economics of Stunted Growth," CJEPS (1962) 28:502-10.

Myth and Measurement: The Innis Tradition in Economic History H.G.J. AlTKEN

It is very hard to find in Canadian scholarship today any serious criticism, of H. Innis. There has developed a kind of "cult of personality" rather like the mystique that now surrounds the Annales school of historians in Europe. There are interesting parallels between the two cases. Innis is known mostly for his work in the "staples theory" of Canadian history and for the later grand-scale extension of that theory to the "staple" of communications and the rise and fall of empires. The staples theory, it is now generally agreed, is not testable. It provides a framework for research, but no one can state what propositions one is required to accept or reject in order to qualify as a staples theorist. M. Watkins, G. Bertram, and K. Buckley have each in their own way gone as far as anyone can in the attempt to transform the staples theory into an operational model of development, but they would be the first to admit that their versions of the thesis—testable and quantifiable though they may be—fall far short of the rich suggestiveness of Innis's approach. Similarly with the Annales school. What is their method? What hypotheses are they testing? What assumptions are we asked to accept or reject? No one can say for sure. And so authority takes over where the logic of empiricism fails, and we have the cult of academic heroes. In the French case there is at least a line of succession: Febvre, Bloch, Braudel. In Canada no economic historian since Innis has come close to matching his reputation or his influence. Such an outcome would have been anathema to Innis himself. No one could castigate monopolies of knowledge more vigorously than he. But we are discussing here his influence, not his intentions, and the fact of the matter is that, in Canadian economic history, Innis still dominates the field. In my personal judgement his influence has not been all to the good. Elsewhere, the last decade and a half in economic history has been one of the most exciting periods ever experienced in the history of the profession. Not so in Canada. There have been, it is true, a few echoes of the revolutionary experiments in methodology going on south of the border. John Dales and others have pointed out where the conventional wisdom is sadly in need of rethinking. And the statistical underpinning of the field is now in much better shape. But a reconstruction of the standard interpretation of Canadian economic history is still a long way off. That standard interpretation, enshrined in monographs Source: H.G.J. Aitken, "Myth and Measurement: The Innis Tradition in Economic History," Journal of Canadian Studies (1977) 12(5): 96-107 (excerpt).

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and textbooks, is an interpretation of the Innis model. It is no compliment to Canadian scholarship that now, twenty-five years after his death, it still monopolizes the field. The man's influence, it is clear, was powerful—perhaps more powerful than he knew, more powerful than he would have wished. Wherein did that power lie? I have spoken of the "power of their ideas" as one of the elements that made these men great teachers, and I mean by that not only explanatory power in the sense in which any scientific theory has explanatory power. I mean also the power to engage the imagination, the power to energize the often dull and tedious work of scholarly research and convert it into an exciting enterprise. It is no coincidence that [the master teachers were] working out of a system of ideas which had this energizing power. For Innis it was originally his "staple thesis" of Canadian economic growth, broadening out at the time I first knew him into a comprehensive theory of the relationship between communications media and the rise and fall of empires. For W.T. Easterbrook it was his theme of enterprise and bureaucracy as the two basic organizational forms of economic life, each of them requiring a particular set of security conditions for its origin and survival. For Schumpeter it was his theory of the entrepreneur and the entrepreneur's role in business cycles and economic development. And for Jenks it was Parsonian sociology, a conceptual apparatus of formidable complexity but also one of extreme comprehensiveness. Each of these men— and I think the same could be said of all good teachers—was teaching and thinking and writing out of a particular "idea-system." And it was the power of the idea-system that caught and held the attention of the student. These "idea-systems" are what I have referred to, in the title of this article, as myths. And I think it will be clear that I am using the word in a particular, almost technical, sense. In popular usage, to refer to a system of beliefs as a myth is to sneer at it, to imply that it is somehow unworthy of the attention of the educated mind. This is not, I believe, a view that serious students of myths, be they anthropologists or theologians, are likely to accept, for they know very well that it is by their myths that people live; that people depend on myths to give meaning, significance, and purpose to their lives; and that cultures are formed as much by myths as by artifacts. Myths, in short, are important; they are functional; they have to be taken seriously. And if this is the view of the serious student of myth, it is also the view of those who create our myths: the poets and artists; the politicians; and, not least, some historians. In the particular sense in which I am using the word, and with particular reference to economic history, I intend to distinguish between myths on the one hand and theories or hypotheses on the other. The basis for the distinction is simply that myths, as such, are not susceptible to disproof. They cannot, that is to say, be subjected to operational verification. And consequently

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they cannot be, in the positivistic sense, either true or false. To a logical positivist this would mean that myths have no meaning: they are made up of metaphysical statements. Within the positivist's system of definitions, this is undeniable. The position I wish to defend is simply that—whether or not they can be empirically tested, and perhaps even because there is no way in which they can be proved or disproved—myths are necessary for creative scholarship. Even more particularly, they are necessary for good teaching. Let me illustrate my meaning by reference to a Canadian example: the so-called "staples approach" to Canadian economic history associated with the name of H. Innis. Three points can be made: 1. There is no way in which the staples approach can be proved right or wrong. This is why one hesitates to refer to it as the staples theory or the staples hypothesis. These words seem too confining. We prefer the phrase "staples approach" precisely because it suggests not a series of testable propositions but a frame of reference, a point of view, a perspective, a way of seeing the data. One can, of course, reasonably discuss the usefulness of this point of view—and Canadian scholars have done so—suggesting that in certain phases of Canadian history the staples approach helps one to see what is really going on, while in other periods it obscures more than it illuminates. But, when we do this, we are discussing the instrumental value of the approach, not its empirical verifiability. 2. Nevertheless, even though not itself testable, it can be and in fact proved to be the source of a multitude of particular theories and hypotheses which could be and were tested. It provided, as it were, a frame of reference within which problems could be seen, and in terms of which hypotheses could be stated. Each of the individual theories or hypotheses is, so to speak, a translation of the myth into one possible testable form. But the particular hypothesis could fail without necessarily causing loss of faith in the myth itself. 3. The vitality of the myth, the power of the ideas that it contains, is shown precisely by its ability to call forth an outpouring of creative research activity. This is why the statement of a powerful myth is typically followed by a flowering of scholarship, a burst of creativity that sometimes makes one feel as if an obstacle to vision has been removed. And similarly, one evidence of the power of a myth is its ability to attract new talent into a field, as new possibilities become evident and new horizons open up. As an example, we may recall the golden age of Canadian economic history that accompanied the statement and elaboration of the staples theme. Earlier, in the United States, much the same thing happened after F.J. Turner's statement of the "frontier theory." And on a much more modest scale, I was associated with something of the same kind at Harvard, in the pioneering days of research in entrepreneurial history. H. Innis was a great scholar and a great teacher because his myths had the power to energize, to inspire, to make one see meanings in history that one had

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not seen before. I make no distinction, in this respect, between the early and the late Innis. Whether he was writing about the fur trade or about the power of empires to control time and space, his technique was essentially the same. And this helps us to understand, also, the deliberate obscurity and difficulty of his writing. One does not expect the makers of myths to follow the cannons of logical positivism. Indeed they cannot, for their myths are suggestive precisely to the extent that they lack identifiable operational meaning. The most precise language of all is mathematics; it can attain that level of precision because it is a purely formal language, devoid of content. One gains precision by losing the suggestibility, the ambiguity, the aura of associations, and allusions that are characteristic of myth. Abandon these features of myth, and you may then hope to work comfortably with numbers, operational definitions and precise measurement. But it is not possible to work in both modes simultaneously. This is what I have referred to in the title of this article as the difference between myth and measurement. The terms are no more than convenient tags for different styles of historical writing, different techniques, if you will, of attaining historical plausibility. I do not mean to suggest that they are polar opposites. There are those, indeed, who would say that belief in measurement as a means of gaining understanding into the processes of history is the greatest myth of all. And Innis himself was never averse to using measurements to garnish his history, when measurements were available. But the difference is, nevertheless, real and important. It is a difference in the strategy of writing and teaching history, a difference between those who hold that truth can be found by counting and those who do not. Innis belonged to the latter way of thinking. And to be a historian in the Innisian mode is necessarily to lean toward myth rather than measurement. If I am correct, developments in Canadian economic history over the last decade and a half—or rather, the relative lack of developments—become more readily understandable. For this has been a period in which the pendulum of style in the writing of economic history has swung decisively toward mear surement. And the new modes of analysis, the new methods, have not proved easy to graft onto the main stem of the old myths. The puzzling question is why these myths have been so resistant to change in Canada, while in the United States most of them have proved vulnerable. The strength of the Innis tradition may be one explanation. In the United States, the last fifteen or sixteen years in economic history have been a strange and somewhat paradoxical period. It has been a period of intense research activity, of very high productivity, of great excitement and change in the profession. And yet it has been a period in which the major thrust of work has been critical and revisionist—directed toward the destruction of old myths rather than the statement of new ones. In this period we have seen the birth of the new economic history, or what is now called cliometrics; and we have seen this movement transformed from a strange innovation into an

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accepted body of techniques and objectives. Its advocates, originally a small minority of scholars of the younger generation, are now the leaders of the profession, a new establishment if you will. And their view of the nature and purpose of economic history—what it should try to be, and how we should undertake to do it—has, in the United States at least, come to be the majority view of the active members of the profession. As all who have lived thorough it will agree, these years have been years of great excitement and interest. It may be an overstatement—indeed, I am sure it is—to refer to this period as constituting a revolution in the methods and philosophy of economic history. But it is unquestionably true that there have been very substantial changes concentrated in a relatively short span of time. Indeed, so substantial have been these changes that it has been a matter of surprise to some of us that the professional structure of economic history, and in particular its Association, has held together over this period, and that the formation of splinter groups and new forms of association has been held to a minimum. There has been more continuity in organization and in the spirit of the profession than one might have expected. At this point it is necessary for me to give a brief sketch of the new economic history and to give some idea of what the advent of this new intellectual style in economic history has meant. Many readers may already be familiar with this information—from them I ask indulgence. But others may not be, and for them a few words of explanation are appropriate. I should make it clear, to begin with, that I do not consider myself to be one of the new economic historians, and I do not believe that anyone else considers me to be one of them. I am, however, in considerable sympathy with most of their objectives; and I am greatly impressed with the sense of new vigour and excitement that they have brought into a somewhat staid branch of scholarship. In particular, they have been responsible for an influx of talent into the field that is truly remarkable. But I cannot claim to be one of that number. The best way to convey an idea of what the new economic history is may well be by the "way of negation"—that is, to describe what it is not. Let me begin then, by stressing that it was not the creation of any one individual, or even a small number. There have been leading figures, of course, and certain universities have from time to time enjoyed the reputation of being its spiritual home. But, this was not a matter of a "school" forming under the influence and leadership of a great scholar. It was much more like a general movement within the profession, and specifically a movement of younger members, almost a matter of generations. In some respects, indeed, it was a radical movement in economic history very characteristic of the climate of the 1960s; and just as disturbing to the morale and self-confidence of those of us of the older generation as were the radical movements in student politics to some conservative faculty members. Its earliest advocates were young doctoral candidates, instructors, and assistant professors, entering economic history from departments of eco-

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nomics in the late 1950s and early 1960s. What they brought with them into economic history was the desire to use, and the conviction that they could use, for purposes of historical analysis, the theoretical and computational skills that they had acquired during their graduate training as economists. Now, this was a desire that others before them had had. The difference was not the desire to use theory in economic history but the confidence that it could be done and some advanced ideas as to how it could be done. The theory that they brought with them was, for the most part, modern neoclassical partial equilibrium theory. Supplementing this was usually a thorough training in statistics, econometrics, national income analysis, and in some cases skill in the handling of large masses of data by computer. If I had to specify the two most salient characteristics that all the early members of the new economic history had in common, I would say that they were all very good theorists, and none of them had any doubts about their ability to handle quantitative evidence on any scale that the historical record might provide. The new economic history is sometimes referred to as quantitative economic history. It is true that its techniques are quantitative. It is not true that this is enough to define it. Quantitative research has always been characteristic of economic history; and even within the last fifteen years there has been much quantitative research done in economic history—for example, by S. Kuznets and his students—which is not part of the cliometric movement. No: it goes deeper than this. What is characteristic of the new economic history is the use of quantitative evidence to test hypotheses derived from theory and stated in terms of theoretical concepts. It is this blending of theory and measurement that is the defining characteristic. The theory has been neoclassical partial equilibrium theory, with some admixture of development theory; the techniques have been derived from statistics and econometrics. This blending of theory and measurement has given the new economic history one of its characteristic techniques; the counterfactual hypothesis. A counterfactual hypothesis usually derives from the attempt to estimate the historical significance of an event by assuming the absence of that event—that is, something contrary to fact—or its change in some specified way, and asking what difference that would have made to the outcome. This is the kind of thing we do every day in a nonsystematic way when we ask, "I wonder what would have happened if. . . ?" It is not a technique much approved by respectable historians. But it has become one of the hallmarks of the new economic history. Thus we find them asking, "What difference would it have made to nineteenth century economic development in the United States if the railroads had not been built? What difference would it have made to the standard of living of American colonists if the Navigation Acts had been repealed? If southern slave-owners had not invested their money in slaves, what would they have invested in, and would they have earned a higher or lower rate of return? If slavery had been abolished in the United States in 1789, would the rate of

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economic development in the American South, or in the nation as a whole, have been higher or lower?" And so on. These are the kinds of questions the new economic historians ask. And not only ask, but also answer quantitatively, and in a way that, they believe, can convince the sceptic. It is the audacity with which such questions are asked, and the confident quantitative way in which they are answered, that have made the work of the new economic historians so controversial and so intellectually stimulating. Hypothetical history of this kind is not, as I have indicated, in much favour with respectable historians of the traditional school. What is it that makes the new economic historians believe they can execute it? It is precisely the marriage of economic theory and econometric technique to which I have just referred. Economic theory makes it possible to define the characteristics of a counterfactual situation—to define them so that "not everything is possible" once one departs from historical reality. Statistics and econometrics make it possible to estimate what difference such a counterfactual change would cause—if not one precise measure, at least an order of magnitude, an upper and lower bound. This is possible because economics has a developed body of theory with predictive power, so that it can be used by economic historians in a way that, so far, political or social theory cannot. It is not measurement alone, then, that characterizes the new economic history, but measurement, inspired by theory and guided by theory. The strengths of the new economic history, its impressive achievements, have been in those areas where economic theory has provided strong support. Its weaknesses and failures have been where the supporting theory has been weak, or where it has been called upon to serve purposes it is inadequate to serve. "The common thread running through the New Economic History is a commitment to the efficacy of theory in specifying useful counterfactuals, and to quantitative methods in implementing them." (Fishlow) The adoption of this philosophy of research and of these techniques of enquiry has generated, over the last fifteen years, one of the most remarkable outbursts of productive activity in the history of our discipline. It is true that most of this activity has been critical in nature: a matter of questioning accepted myths and revising accepted interpretations rather than propounding new ones. And it is also true that, when one stands back and considers the end result, many of the old interpretations have withstood the critical attack rather well. We now have to be more careful to say exactly what we mean; we have to be on guard against the dangerously dramatic phrase—the take-off, the revolution, the indispensability of this or that—that says more than we are entitled to say. This is good for our souls, and the whole episode has had a pronounced cleansing and astringent effect on the discipline. It has also added very substantially to our factual knowledge of the past. And, perhaps most important, it has attracted into the discipline a cadre of highly intelligent and

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highly trained economists who, in all probability, would otherwise never have considered becoming economic historians. All this is to the good. And yet the success has not been unqualified. And it seems now as if these qualifications are becoming apparent. Neoclassical economic theory was a system of ideas designed to show the principles by which scarce resources are efficiently allocated among competing uses. As we all know, to elucidate these principles it considered the implications of incremental changes at the margin; and its typical device, particularly in its Marshallian form, was to consider only a single change at a time, all other factors in the situation being held constant. Consider for a moment what neoclassical economic theory was not, and what it was not intended to be. It was not a theory of long-run economic change. It was not a theory of nonmarket behaviour. It was not a theory of discontinuous change—"Nature makes no jumps," said Marshall. And it was not a theory of social institutions; in particular it had no theory of the state, and therefore was, strictly speaking, inapplicable to any problem in which the survival or growth of the state was a prime consideration. In view of these rather obvious facts, it is remarkable that the new economic historians have been able to make such effective use of neoclassical economic theory. This may prove, as my friend John Dales has often said, that in economic history just a little theory will carry you a long way. Or it may be a tribute to the skill and ingenuity of the new economic historians in converting into a form with which neoclassical theory could come to grips problems originally of a quite different nature: that is converting general equilibrium problems into a partial equilibrium form; converting discontinuities into continuities; and conceiving of long-run development in terms of short-run shifts at the margin. The degree of success is still remarkable; for the problems the new economic historians have chosen to deal with—the influence of the railroads, the effect of slavery on long-run growth, large changes in government policy such as the dismantling of a mercantalist empire, and so on—are far distant indeed from any problems that neoclassical economic theory was designed to deal with. It has been, I say, remarkable. And you will notice that I use the past tense. The reason for this is that there are clear signs of a growing dissatisfaction with the limitations of the new economic history as it has been carried on so far. These limitations have been the limitations of the underlying theory; and they have been responsible for the often rather strained forcing of historical problems into a form with which an essentially ill-suited theory could deal. This dissatisfaction is being voiced most strongly, not by outside critics, but by the leaders of the movement themselves. What they are calling for is not abandonment of the commitment to theory and measurement that has inspired their work for the last decade and a half. What they are calling for is the statement of theories that will be less restrictive. This is why I think we

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may be at some kind of a turning point in the history of economic history at this moment: a shift (in the terms I have been using in this paper) away from the phase of myth-destruction and myth-criticism that has occupied the last fifteen years, and towards a new phase of myth-statement and myth-creation. It will be interesting to watch how this new phase develops. The characteristic techniques of the new economic history have involved an insistence on the explicit statement of theoretical models and on the quantitative testing of hypotheses. These techniques have been excellently adapted for the tasks of critical revision which have so far been the principal occupation of the movement. It remains to be seen how far they can be reconciled with the demands of myth-creation, which may involve a much looser use of concepts and the postulating of relationships that may be hard to test empirically. Do I exaggerate the indications that a change of this kind is taking place? I think not. I turn to the pages of the Journal of Economic History, and I find a presidential address by William Parker of Yale entitled "From Old to New to Old in Economic History." In it he very appropriately commends the achievements of the new economic history (to which he has himself contributed in no small way), calling it a "gigantic test of the hypothesis of economic rationality," or alternatively, "A kind of hymn to what really happened. . . justifying the ways of the price system to man." But then he turns to what he calls the second great truth that modern economic history can teach us; and here the new myth enters. The second great truth turns out to be the truth of the recurring opportunity, the truth of "the invisible hand which. . . within some societies. . . appears to have contrived their whole structure. . . in such a way as to create and refresh the stream of growth opportunities to which their economics can respond." And within a few pages we find him calling for a redirection of work, so that we may increase our understanding of "how social organizations are created through human action and how in turn they mold and channel human action." Or alternatively we turn to the presidential address of D. North, long one of the most eloquent advocates of the new economic history, and we find him, in the March 1974 issue of the same journal, not listing its achievements but itemizing its limitations: its destructive thrust; its concentration on specific issues or institutions rather than long-run processes of change; its neglect of the role of government and of the "overwhelming percentage" of economic decisions that have always been made "outside the market"; and—this I find particularly significant—the fact that North finds the new economic history "curiously unteachable at the undergraduate level"—that it "leaves students frustrated" because of its failure to "provide any integrated explanation of man's economic past." This is clearly related to what A. Fishlow of Berkeley has called the "dramatizing" influence of the new economic history—what I would call its demythologizing influence—but North gives more emphasis to its failure to grapple with the dynamics of change. "If we have found slavery

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profitable," he writes, "railroads less than essential, and the burden of the Navigation Acts 'light,' we have not said what did make the system go." And, in pursuit of this goal of understanding "what did make the system go," North's own work has recently taken a decided turn toward the analysis of institutional change over the long run. The clearest demonstration of my point, however, comes from the recent work of two scholars who are commonly regarded as among the leading exponents of the new economic history. I refer, of course, to R. Fogel and S. Engerman and to their recent study of American slavery, Time on the Cross. I have no desire to add my quota to the intense controversy that the appearance of this book has aroused—controversy entirely typical of the forceful statement of a new myth. I ask you only to consider the authors' stated objectives. Chief among these objectives is "the recovery of black history": that is, its recovery from the racist interpretations promulgated previously by white historians, including particularly liberal white historians. Fogel and Engerman are concerned to present to blacks an image of their past in which they can take pride; and it is to the creation and elaboration of that image that all the quantitative calculations which fill the pages of Time on the Cross are directed. Their purpose is to destroy an unacceptable and, in their view, indefensible myth and replace it with one more acceptable and more defensible. Indeed, they are quite candid in stating this purpose. Here is the concluding paragraph of their text: Time on the cross did not come to an end for American blacks with the downfall of the peculiar institution. For they were held on the cross not just by the chains of slavery but also by the spikes of racism. It is one of the bitterest ironies of history that the antislavery critics who worked so hard to break these chains probably did as much as any other group, perhaps more, to fasten the spikes that have kept blacks in the agony of racial discrimination during their century of freedom. The spikes are fashioned of myths that turned diligent and efficient workers into lazy loafers and bunglers, that turned love of family into a disregard for it, that turned those who struggled for self-improvement in the only way they could into "Uncle Toms." Three hundred and fifty years on the cross are enough. It's time to reveal not only to blacks but to whites as well, that part of American history which has been kept from then—the record of black achievement under adversity.1 For the intellectual audacity that inspires these ventures—both those of Fogel and Engerman and the types of work now projected by scholars like North and Parker—I have the highest respect. I do not wish to leave the impression that I regard them as in any way misguided. The only point I wish to make is that this kind of work is a far cry indeed from the explicitly specified models and

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quantified variables that were the standard fare of the new economic history in its earlier critical phase. And it is a fair question whether the techniques— and perhaps also the attitude of somewhat puritanical self-righteousness—that characterized the earlier phase will also serve in the second. We are no longer tearing down myths that an older generation of economic historians created. We are creating myths of our own—ones that in time will no doubt be subjected to the same kind of radical criticism that has been the stock in trade of the new economic history in the past fifteen years. Predicting the future course of fashion is no less hazardous in scholarship than in more commercial endeavours. As regards research and writing in American economic history, however, the odds seem very high that the next fifteen years will prove at least as interesting and active as the last fifteen have been. The pendulum has begun its reverse swing: the urgent need for what I have called myths—for generalizations on a broader and more ambitious scale—is coming to be recognized and the profession is now staffed by cadres of young scholars of exceptional technical competence. It will be an interesting period to watch. But what of Canadian studies? The cliometric revolution south of the border has not been entirely without its "ripple effects" in Canada. There have been annual conferences, attended mostly by younger scholars who received their graduate training in the United States. One can cite a baker's dozen of Canadian cliometric contributions, each of them valuable but of limited scope. And there has been a healthy growth of dissatisfaction with economic history's conventional wisdom. None of this, however, has added up to the reconstruction of Canadian economic history that is now overdue by at least a quarter of a century. The traditional interpretations are still taught in classrooms across the country. A textbook written in the most conventional of "staples approach" modes still, wonder of wonders, retains its hold on the market. Only the most incurable of Pollyannas could discern symptoms of a creative stirring, far less of a new synthesis, in Canadian economic history at the moment. And this in Canada, which once under the leadership of H. Innis, could make a fair claim to world eminence in the field. Personally, I lean toward optimism. After all, why not? Any other attitude inhibits one's own work and stifles that of one's students. For economic history in general the omens look good. With the close of the initial phase of critical revisionism and myth-destruction, economic historians are once again starting to reach out towards those larger idea-systems that have the power to excite the imagination and elicit the kind of commitment to scholarship that H. Innis could draw from his students. For economic history in Canada even more may be hoped, for here the reaction against the inherited truths has been muted and delayed, and the new synthesis, when it does come, may be more dramatic and more revolutionary than in all the United States. The Innis tradition, after all, is a resource as well as a constraint, for no Canadian

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historian can afford to forget the courage, the audacity, the sheer power of Innis's ideas at their best. And there are broader issues at stake. If we can lift our eyes for a moment from purely academic concerns, we may remind ourselves that historical myths are important not only for the narrow fraternity of scholars but also for the larger community of which they are a part. What we teach in our lecture rooms and graduate seminars today is what will be taught in the high schools of the next generation—and what will be taken for granted as "what everyone knows" in the generation after that. It is the myths that are remembered by students long after the measurements axe forgotten. And these myths are important because the way a people thinks of its past is important: important to the way it regards itself in the present and to what it thinks is possible in the future. The staples thesis, in the hands of Innis and his school, provided a rationale for the existence of the Canadian nation. It helped to make what had happened understandable and what existed acceptable. It placed Canada in historic time, so that you could see it whole and believe that you comprehended it. That myth has now lost its power, as all myths eventually must if they are not continually refreshed and reinterpreted. What takes its place is a matter of some importance, to Canadians and to all who wish them well.

Notes [1] R. Fogel and S. Engerman, Time on the Cross (Boston, 1974):263-264.

Part Two

Early Staples, Agriculture and Finance

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The Fur Trade in Canada H.A. INNIS

The history of the fur trade in North America has been shown as a retreat in the face of settlement. The strategic campaigns in that retreat include the conquest of New Prance, the Quebec Act of 1774, the American Revolution, the Jay Treaty of 1794, the amalgamation of 1821, the Oregon Treaty of 1846, and the Rupert's Land Act of 1869. The struggle continues in the newly settled areas of the Dominion. The trade has been conducted by large organizations from the artificial and natural monopolies of New France to the North West Company and the Hudson's Bay Company, which still occupies an important position. It has depended on the manufactures of Europe and the more efficient manufactures and cheaper transportation of England. Control of the fur trade was an index of world importance from the standpoint of efficient manufactures, control of markets, and consumption of luxuries. The shift from Paris to London of the fur trade was significant of the industrial growth of Prance and England—just as possession of Canada after the American Revolution was significant of the industrial limitations of the United States. The demands of the Indians for cheaper and greater quantities of goods were determining factors in the destiny of the northern half of North America. The crises which disturbed the history of the fur trade were determined finally by various important factors including the geographic background and the industrial efficiency of England. These long-run factors were obscured by a complexity of causes which centred about each crisis. In the first half of the seventeenth century the Indian trading organization was essential to the trade. In the latter part of the century the French trading organization in the interior became more effective and the market became flooded with furs. Finally the geographic limits of the trade with the canoe were reached with the extension of the trade to the Saskatchewan in the first half of the eighteenth century. In the second half of the century transportation became more efficient with the development of lake transportation supplementary to the canoe, and the trade was extended with increased capital resources and efficient business organization to the Pacific. With continued decline in the supply of beaver and the development of more-efficient transportation and of a more-elastic business organization from Hudson Bay, amalgamation became inevitable and the canoe disappeared as the dominant form of transportation in the fur trade. Dependence on the York boat rather than the canoe was symbolic of the increasing importance of capitalism. After the amalgamation, improved transportation facilities from the south led to the disappearance of monopoly control in 1869 Source: H.A. Innis, The Far Trade in Canada: An Introduction to Canadian Economic History, rev. ed. (Toronto: University of Toronto Press, 1956), 386-392. Reprinted by permission of the publishers.

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and to the reign of competition which has become increasingly severe since that date. The beaver became less important after the amalgamation and the trade more dependent on other varieties of furs. Supply decreased less rapidly and in spite of competition the trade continued on a more permanent basis. Severe fluctuations were the result, throughout the period, of the discoveries of new territory and new Indians but especially of wars. These fluctuations were more serious in the earlier period of the French regime and occasioned serious results for the colony and the mother country. They became less serious after the Conquest and were less disastrous to the mother country. With the disappearance of these fluctuations, business organization became more efficient. But in the long run improved transportation combined with geographic advantages reigned supreme. It was significant, however, that business organization was of vital importance to the trade and, combined with geographic advantages, maintained a strong position. This combination favoured the growth of capitalism which became conspicuous in the later days of the North West Company and in the succeeding Hudson's Bay Company especially after 1869. The early history of the fur trade is essentially a history of the trade in beaver fur. The beaver was found in large numbers throughout the northern half of North America. The better grades of fur came from the more-northerly forested regions of North America and were obtained during the winter season where the fur was prime. A vast north temperate land area with a pronounced seasonal climate was a prerequisite to an extensive development of the trade. The animal was not highly reproductive and it was not a migrant. Its destruction in any locality necessitated the movement of hunters to new areas. The existence of the animal in large numbers assumed a relatively scant population. It assumed an area in which population could not be increased by resort to agriculture. Limitations of geological formation, as well as climate and a cultural background dependent on these limitations precluded a dense population with consequent destruction of animal life. The culture was dependent on indigenous flora and fauna and the latter was of prime importance. Moose, caribou, beaver, rabbit or hare, and fish furnished the chief supplies of food and clothing. This culture assumed a thorough knowledge of animal habits and the ability of the peoples concerned to move over wide areas in pursuit of a supply of food. The devices which had been elaborated included the snowshoe and the toboggan for the winter and the birch-bark canoe for the summer. This wide area contained numerous lakes and difficult connecting waterways, to which the canoe was adapted for extensive travel. Movement over this area occasioned an extended knowledge of geography and a widespread similarity of cultural traits such as language. The area which was crucial to the development of the fur trade was the Precambrian shield of the northern half of the North American continent. It extended northwesterly across the continent to the mouth of the Mackenzie River and was bounded on the north by the northwesterly isothermal lines

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which determined the limits of the northern forests and especially of the canoe birch (b. papyri/era). The fur trade followed the waterways along the southern edge of this formation from the St. Lawrence to the Mackenzie River. In its full bloom it spread beyond this area to the Pacific drainage basin. The history of the fur trade is the history of contact between two civilizations, the European and the North American, with special reference to the northern portion of the continent. The limited cultural background of the North American hunting peoples provided an insatiable demand for the products of the more elaborate cultural development of Europeans. The supply of European goods, the product of a more advanced and specialized technology, enabled the Indians to gain a livelihood more easily—to obtain their supply of food, as in the case of moose, more quickly, and to hunt the beaver more effectively. Unfortunately the rapid destruction of the food supply and the revolution in the methods of living accompanied by the increasing attention to the fur trade by which these products were secured, disturbed the balance which had grown up previous to the coming of the European. The new technology with its radical innovations brought about such a rapid shift in the prevailing Indian culture as to lead to wholesale destruction of the peoples concerned by warfare and disease. The disappearance of the beaver and of the Indians necessitated the extension of European organization to the interior. Newly discovered tribes demanded European goods in increasingly large amounts. The fur trade was the means by which this demand of the peoples of a more limited cultural development was met. Furs were the chief product suitable to European demands by which the North American peoples could secure European goods. A rapid and extensive development of the trade followed access to the vast areas of the Canadian Shield via the St. Lawrence and its numerous tributaries and via the rivers of the Hudson Bay drainage basin. Following a rapid decline in the supply of beaver in more accessible territory and the necessity of going to more remote areas, the trade began in the Maritime Provinces, extended rapidly, via the Saguenay and later the St. Lawrence and the Ottawa, to the Great Lakes, and northwesterly across the headwaters of the rivers of the Hudson Bay drainage basin from Lake Superior to Lake Winnipeg, the Saskatchewan, the Churchill, across the headwaters of the Mackenzie River drainage basin to the Mackenzie and Peace rivers, and finally to the headwaters of rivers of the Pacific coast to New Caledonia and the Columbia. The waterways along the edge of the Canadian Shield tapped the rich fur lands of that area and in the smaller rivers of the headwaters of four drainage basins provided an environment to which the canoe could be adapted. The extension of the trade across the northern half of the continent and the transportation of furs and goods over great distances involved the elaboration of an extensive organization of transport, of personnel, and of food supply. The development of transportation was based primarily on Indian cul-

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tural growth. The birch-bark canoe was borrowed and modified to suit the demands of the trade. Again, without Indian agriculture, Indian corn, and dependence on Indian methods of capturing buffalo and making pemmican, no extended organization of transportation to the interior would have been possible in the early period. The organization of food supplies depended on agricultural development in the more favourable areas to the south and on the abundant fauna of the plains area. Limited transportation facilities, such as the canoe afforded, accentuated the organization and production of food supply in these areas. The extension of the fur trade was supported at convenient intervals by agricultural development as in the lower St. Lawrence basin, in southeastern Ontario and areas centring on Detroit, in Michilimackinac and Lake Michigan territory, and in the West at Red River, though the buffalo were more important in the plains area in the beginning, and eventually in Peace River. On the Pacific coast an agricultural base was established on the Columbia. The increasing distances over which the trade was carried on and the increasing capital investment and expense incidental to the elaborate organization of transport had a direct influence on its financial organization. Immediate trade with Europe from the St. Lawrence involved the export of large quantities of fur to meet the overhead costs of long ocean voyages and the imports of large quantities of heavy merchandise. Monopoly inevitably followed, and it was supported by the European institutional arrangements, which involved the organization of monopolies for the conduct of foreign trade. On the other hand, internal trade—following its extension in the interior, the demand for larger numbers of voyageurs and canoes to undertake the difficult task of transportation, and the increasing dependence on the initiative of the trader in carrying on trade with remote tribes—was, within certain limits, competitive. Trade from Quebec and Montreal with canoes up the Ottawa to Michilimackinac, La Bale, and Lake Superior could be financed with relatively small quantities of capital and was consequently competitive. Further extension of trade through Lake Superior by Grand Portage (later Kaministiquia) to Lake Winnipeg, the Saskatchewan, Athabasca, and Mackenzie rivers, and to New Caledonia and the Pacific coast involved heavy overhead costs and an extensive organization of transportation. But the organization was of a type peculiar to the demands of the fur trade. Individual initiative was stressed in the partnership agreements which characterized the North West Company. The trade carried on over extended areas under conditions of limited transportation made close control of individual partners by a central organization impossible. The North West Company, which extended its organization from the Atlantic to the Pacific, developed along lines which were fundamentally linked to the technique of the fur trade. This organization was strengthened in the amalgamation of 1821 by control of a charter guaranteeing monopoly and by the advantages incidental to lower costs of transportation by Hudson Bay.

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The effects of these large centralized organizations characteristic of the fur trade as shown in the monopolies of New Prance, in the Hudson's Bay Company, and in the North West Company were reflected in the institutional development of Canada. In New Prance constant expansion of the trade to the interior had increased costs of transportation and extended the possibilities of competition from New England. The population of New Prance during the open season of navigation was increasingly engaged in carrying on the trade over longer distances to the neglect of agriculture and other phases of economic development. To offset the effects of competition from the English colonies in the south and the Hudson's Bay Company in the north, a military policy, involving Indian alliances, expenditure on strategic posts, expensive campaigns, and constant direct and indirect drains on the economic life of New Prance and old France, was essential. As a result of these developments control of political activities in New France was centralized and the paternalism of old Prance was strengthened by the fur trade. Centralized control as shown in the activities of the government, the church, the seigneurial system, and other institutions was in part a result of the overwhelming importance of the fur trade. The institutional development of New France was an indication of the relation between the fur trade and the mercantile policy. The fur trade provided an ample supply of raw material for the manufacture of highly profitable luxury goods. A colony engaged in the fur trade was not in a position to develop industries to compete with manufactures of the mother country. Its weakness necessitated reliance upon the military support of the mother country. Finally the insatiable demands of the Indians for goods stimulated European manufactures. The importance of manufactures in the fur trade gave England, with her more efficient industrial development, a decided advantage. The competition of cheaper goods contributed in a definite fashion to the downfall of New France and enabled Great Britain to prevail in the face of its pronounced militaristic development. Moreover, the importance of manufactured goods to the fur trade made inevitable the continuation of control by Great Britain in the northern half of North America. The participation of American and English merchants in the fur trade immediately following the Conquest led to the rapid growth of a new organization1 which was instrumental in securing the Quebec Act and which contributed to the failure of the American Revolution so far as it affected Quebec and the St. Lawrence. These merchants were active in the negotiations prior to the Constitutional Act of 1791 and the Jay Treaty of 1794.2 As prominent members of the government formed under the Quebec Act and the Constitutional Act, they did much to direct the general trend of legislation. The later growth of the North West Company assured a permanent attachment to Great Britain because of its dependence on English manufactures.

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The northern half of North America remained British because of the importance of fur as a staple product. The continent of North America became divided into three areas: (1) to the north, in what is now the Dominion of Canada, producing furs, (2) to the south, in what were during the Civil War the secession states, producing cotton, and (3) in the centre the widely diversified economic territory, including the New England states and the coal and iron areas of the mid West, demanding raw materials and a market. The staple-producing areas were closely dependent on industrial Europe, especially Great Britain. The fur-producing area was destined to remain British. The cotton-producing area was forced after the Civil War to become subordinate to the central territory just as the northern fur-producing area, at present producing the staples—wheat, pulp and paper, minerals, and lumber—tends to be brought under its influence. The North West Company and its successor the Hudson's Bay Company established a centralized organization which covered the northern half of North America from the Atlantic to the Pacific. The importance of this organization was recognized in boundary disputes, and it played a large role3 in the numerous negotiations responsible for the location of the present boundaries. It is no mere accident that the present Dominion coincides roughly with the furtrading areas of northern North America. The bases of supplies for the trade in Quebec, in western Ontario, and in British Columbia represent the agricultural areas of the present Dominion. The North West Company was the forerunner of the present confederation. There are other interesting by-products of the study which may be indicated briefly. Canada has had no serious problems with its native peoples since the fur trade depended primarily on these races. In the United States no point of contact of such magnitude was at hand and troubles with the Indians were a result. The existence of small and isolated sections of French half-breeds throughout Canada is another interesting survival of this contact.4 The half-breed has never assumed such importance in the United States. "The lords of the lakes and forest have passed away" but their work will endure in the boundaries of the Dominion of Canada and in Canadian institutional life. The place of the beaver in Canadian life has been fittingly noted in the coat of arms. We have given to the maple a prominence which was due to the birch. We have not yet realized that the Indian, and their culture were fundamental to the growth of Canadian institutions. We are only beginning to realize the central position of the Canadian Shield.

Notes [I] See K.B. Jackson (as M.G. Reid), "The Quebec Fur-traders and Western Policy, 1763-1774," Canadian Historical Review, VI, 1925:15-32.

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[2] See W.E. Stevens, The Northwest Fur Trade, 1763-1800 (Urbana, 111., 1928). [3] Ibid. [4] See M. Giraud, Le Metis Canadien: son role dans I'histoire des provinces de I1 Quest (Paris, 1945).

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"All the Fish of the Post": Resource Property Rights and Development in a Nineteenth Century Inshore Fishery R.E. OMMER H. Innis once described the eastern Canadian cod fisheries as "inherently divisive" and history has tended to bear him out.1 In the past, the fishery has set fisherman against fisherman, merchant against merchant, merchant against planter and settler against metropolitan government. In the present, it continues to produce conflicts, of provincial against federal government, province against province, multinational against independent producer, midshore against inshore fisherman. The nature of the resource lies at the root of the conflict. As a common-property resource with an unprotected rent, the fishery is theoretically open to all. Historically, the fact that the fishery is an open-access resource has resulted in a fear that insecure control of access would result in diminished profits; today concern is expressed over diminished or depleted stocks, lost value added and what economists call "dissipation of the economic rent."2 The S. Gordon model is the best-known modern statement demonstrating that because the fishery is an open-access resource, its unregulated exploitation will in theory lead to decreasing returns to capital and labour as a result of excess factor supply.3 This model, however, inadequately describes the dynamics of the industry in eighteenth- and nineteenth-century Atlantic Canada when fish merchants were able to devise means of controlling access of both labour and capital to the resource. Such control amounted to the establishment of "property rights" over the resource which prevented dissipation of the economic rent of the fishery, resulting in a viable industry. Although scholars until recently regarded the Westcountrymen as the major merchant group dominating the North Atlantic cod fisheries because of their role in the settlement and economy of Newfoundland, the Jersey fishery in the Gulf of St. Lawrence was spatially very extensive. The Jerseymen operated an inshore fishery conducted in a string of small to medium-sized establishments which stretched from the Strait of Belle Isle around the North Shore of the Gulf to Gaspe, the Baie des Chaleurs including Caraquet, the Magdalen Islands, Cape Breton (especially around Arichat, the Gut of Canso and Cheticamp) and the south and west coasts of Newfoundland. The principal headquarters for most of these establishments was Paspebiac in the Baie des Source: R.E. Ommer, "'All the Fish of the Post* Resource Property Rights and Development in a Nineteenth-Century Inshore Fishery," Acadiensis (1981) 10(2):107-23. The author wishes to acknowledge the assistance of S. Pierson, L.R. Fischer, J. Killer, J. Fitzgerald and three anonymous readers who made comments on an earlier draft of this paper.

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Chaleurs, the centre of New World operations for the firm known as Charles Robin and Company or CRC.4 C. Robin, operating as an agent for Philip Robin and Company of Arichat, first entered the Gulf of St. Lawrence in 1766 when the area was new territory for British fishing firms.5 The area was sparsely settled in these early years: in 1765 there were 209 persons in the Baie des Chaleurs, 93 Indians in the Restigouche area and 109 persons in Gaspe. By 1774-5 there were 200 persons in the Baie des Chaleurs and 158 at Bonaventure. By 1777, Nicholas Cox reported three families at "Gaspee" and four on Bonaventure Island, two families at each of the seigneuries of Grand River and Pabos, and ten families (sixty persons) wintering at Pasp6biac. Malbaie and Point St. Peter he described as "inhabited by people from the Rebel Colonies who came away at the Commencement of the War" and some Acadians had settled at Bonaventure and Tracadigaiche.6 The Census of Canada gives a total population, seasonal and permanent, of 874 persons on the coast between Gaspe and Tracadigaiche in 17777 During the 1778 season, American privateers disrupted C. Robin's early operations on the coast and by September he had left for Jersey, not to return until 1783, when he established Charles Robin and Company. He applied for grants of land in the Paspebiac area for himself and the settlers with whom he had done business prior to the wartime disruptions of the fishery. In 1783 the Paspebiac population was also considerably expanded by an influx of 435 Loyalist settlers.8 Prom its inception, then, the firm of CRC had to deal with a resident population. As in all sea fisheries, access to the resource had to be limited if the economic rent was not to be dissipated. The early history of the British North American fisheries can be seen as the search by fish merchants for a strategy that would guarantee their profits by protecting their access to the resource and excluding competition. In the early Newfoundland-West Country migratory fishery, for example, the "standard mode of mercantilist exploitation" was to attempt to prohibit settlement, at least in part because a non-resident fishery did not have to deal with the threat of competition which a resident population on the Newfoundland coast would have created.9 In Gaspe, C. Robin was faced with the same problem. Yet curiously, in the light of the Newfoundland experience, he not only tolerated a resident population over whose existence he had no control, but actually encouraged settlement, recommending that settlers who had improved their lands prior to the disruptions of 1778 be given grants. This behaviour ensured that CRC had to cope with resident competition for the resource. Robin was certainly aware of the threat posed by settlers in the area, since he saw land on the Gaspe coast as the means of access to the fisheries. In 1792, he wrote to his London agents that his competitors, Messrs. Matthew Stewart and Company, were planning to purchase a seigneurie in Gaspe: "a post that furnishes us yearly at least 2000 quintals of fish. . . . If they succeed we shall have a rent to pay of at least 26 quintals of fish. . . . But

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the principal consequence will be that the Seigneur will have all the fish of the post."10 Nonetheless, while concerned about the existence of merchant competition on the coast, Robin was unconcerned about other settlers, even though the latter had been the original problem in the old West Country migratory fishery. Prom the beginning of his enterprise in 1766, Robin had operated a supply business into the area; indeed, it is likely that, operating from his ship, he had sold salt and goods to the local inhabitants in return for fish.11 In 1767, he began an establishment at Paspebiac and thereafter expanded his supply and barter business, laying the foundations of a truck system in the area. The truck system is usually defined as the use of barter rather than cash as the medium of exchange in a local community, which results in a labourer's indebtedness to the company store. But as it operated in the Jersey fishery, the truck system was not merely one of a variety of mercantile "capital-saving devices: employees without families, long deferment of wages, truck pay and other ingenious credit mechanisms."12 More importantly, this system was the means by which merchants minimized the risk of having their control over access to the fish challenged by independent, indigenous fishermen. This control was achieved by establishing a trade-off between fisherman and merchant interests. Essentially, the merchant provided the gear for the year's fishery along with provisions, all on credit against repayment in fish at the end of the season. The merchant took over the individual fisherman's risk of a season's capital outlay in such things as gear, boat and provisions, while the fisherman in return guaranteed to sell his catch to the merchant. The attraction of the truck system to local planters was that they were protected against the built-in instabilities of the fishery, such as glutted markets or a run of bad years when the fish did not strike on the coast. That was the kind of crisis which a small independent producer, with limited capital resources, could not survive; and that kind of protection was what a distant merchant in Halifax or Quebec City does not seem to have offered, since traders into the area preferred payment in cash in good years and no business in bad years. This risk, then, was lifted from the planters' shoulders in return for "all the fish of the post." But the truck system led to increased risk for the merchants. A run of bad years, or a series of poor markets, would mean that the merchants' risk-carrying role of providing provisions and gear would work against them, since they would be forced to carry the capital costs without being able to realize their investments through the fish returns that they would normally receive at the end of the fishing season. They had, therefore, to possess sufficient capital to be able to ride out such crises. Merchants who over-invested (that is, provisioned unwisely) or over-paid for fish, thereby depleting their capital, ran a grave risk of being unable to weather the bad years when they came. Hence CRC's continual preoccupation with advances and

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their constant concern that credit should not be over-extended nor the price of fish on the coast rise too high, even if this meant a loss of labour and therefore a contraction of access to the resource. While the truck system secured for the merchant control over the fish, fine judgement was needed in its application, so that maximum control was maintained at minimum capital outflow. In the early years of the business Robin, alone among the various companies in the Gaspe, managed to weather the difficulties of maintaining this system. He commented of his competition on the coast that "the Guernsey employ finally gave up business, after having incurred most heavy losses, and has been succeeded by a Jersey Employ which has not been much more fortunate; Fiott and Co., Hamond and Co. gave up the business for want of success; all the others have equally disappeared through the same cause,"13 These companies had all been established on the coast by the early 1780s when the population began to expand, but all had failed by the turn of the century. Robin thought the place too poor to support them, arguing that if all those businesses which had attempted to establish in Gaspe had in fact been successful, the area would have attracted more fish merchants, 'Svhich is not nor can be the case."14 Whether his estimation of Gaspe was true, or merely designed to discourage others, it is certainly arguable that merchant competition was Robin's greatest threat, feasible that the area could only support one resident merchant company operating a truck system at that time, and likely that he eliminated resident merchant competition through skilful manipulation of the truck system.15 This system had a built-in mechanism for protection against merchant competition. Since provisions were placed to the debit of a fisherman's account as advances and his catch to his credit, one bad year in the fishery was enough to ensure that a fisherman would complete a season either in debt or emptyhanded. In either case, unable to raise the capital to provision himself over the winter months, he would have to seek further advances from the merchant against his catch of the following season. The price for fish was set by the merchant, usually at the beginning of the season, and usually in Jersey, where it was established with reference to market prices for fish during the previous season. If other merchants were in the area, as happened again by the 1840s, their price would also be taken into account.16 CRC would lower their price only to the degree that they would still be able to maintain their fishermen who might otherwise sell their fish to a better-paying merchant, despite the legal consequences. CRC also took care to be well-stocked with provisions, since this gave them a competitive edge. "I have now . . . all good fishermen, in fact the best in this place. Mr. LeBoutillier having no provisions has been the main cause of their leaving him. They all owe him, more or less, and are afraid that he will sue them . . . I'll take deeds from those that owe us and in the amount include their advances," wrote one agent on the coast to headquarters in Jersey.17

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Excessive intermerchant competition would have destroyed the whole basis on which the truck system rested, since it would have freed fishermen from debt. Price wars were not pursued, therefore, to the point where independence from the firm could have been gained and the economic rent from the catch lost. Such wars might destroy a merchant if a series of bad years occurred and capital became over-extended, as seems to have happened to C. Robin's early competitors. Traders, who were always present along the coast, did not offer the same kind of threat since they did not operate a truck system but dealt in cash. While their operations might result in an irritating seepage of fish out of the merchant system, and hence a decrease in economic rent, they did not threaten CRC's control. A recalcitrant fisherman could be punished by a merchant's refusal to outfit him in the following season, thereby leaving him without the buffer against risk which the truck system provided. The truck system thus tied the otherwise-independent planter, who posed the greatest threat to concentration of the economic rent in the hands of the merchant, to the firm. The independent resident who provided his own equipment, who owned his boat and gear, passed on his ownership of the means of production to the merchant firm in exchange for a buffer against bad years and capital depletion. The resulting indebtedness lost him his independence and tied him to the merchant who thereby secured his loyalty and, more importantly, his supply account, his catch and thus his portion of the economic rent to be captured from the sale of his fish.18 Independent planters were not, of course, the only labour force in the Gulf. Jersey crews were brought in by CRC to do fishing for the firm in its own right: some settlers, such as the Magdalen Islanders, were only parttime fishermen; there were poor fishermen who were incapable of supplying their own equipment and who were more akin to labourers than planters; and there were migrant shore crews who came seasonally into the area to work for the Jerseymen. None of these posed the serious threat to dissipation of the economic rent that the planters, or other merchants, represented.19 In fact, all but one of these groups were subject to some form of merchant control. In the case of the Jersey crews, indentures kept them tied to the firm, which either gave them a trade (or skill, in the case of apprentice clerks) in return for their labour, or a wage which supplemented their family income back home in Jersey. A modified barter system was used with part-time fishermen, and a full-scale barter system operated in the case of the engage. Since the latter sold his labour to the firm at a fixed rate of barter in return for the use of the firm's equipment, his catch never belonged to him at any stage of the proceedings. The engage was the fishery's equivalent of a landless labourer who could not hope to own the means of production: the fisherman without a boat. The seasonal migrant labour, composed of French-Canadian splitters and salters hired annually by the firm's agents from the area around Quebec City, were paid cash. Since they were not resident on the coast and did not catch the fish

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but were involved in the on-shore processing, they posed no threat to Jersey hegemony in the Gulf fishery and thus it was not necessary to prevent capital formation among them. The strategy used by CRC to capture the economic rent of the fishery, which revolved around the instigation and operation of the truck system, left the firm in control of access to the resource, both directly in terms of its own fishing effort and indirectly through control of other fishermen on the coast. In no other staple trade was access to the resource so immediately open, and in no other staple trade was it so tightly controlled and protected by private enterprise.20 The fishing village—the spatial expression of the merchant's modus operandi—was a functionally integrated and spatially concentrated production unit, not merely a residence or service centre for the industry. It was not only the productive unit but also the processing unit, the point of collection of the staple and of distribution of the requirements of the industry, the point of importation and of exportation, and the point of local management over all these functions. It was small, compact and it looked to the sea for both the exploitation and the transportation of the fish which were its raison d'etre and for which it was the point of access. The cod fishery required no roads and only minimal landward development to service the industry. The village imported all its needs and exported all produce by sea without drawing on the surrounding area, and thus it could assemble all its inputs and put together its outputs at no additional transportation cost. In J.E. Vance's terminology, the "consumption system receiving trade" and the "production system returning trade" were subsumed within the same outport.21 The village was therefore a spatial expression of the control which the merchant acquired on the coast. Through this import/export monopoly the merchant controlled the access of the fisherman to the market by buying the fish from him in exchange for supply goods into the fishery and protection from insecure markets and bad years. This control was doubly secure since not only were the fish sold abroad but supplies came from abroad and local fishermen did not have the financial capacity for building or owning oceangoing vessels.22 Paspebiac was the heart of this CRC merchant system in the New World. It was the principal collection depot for fish, distribution centre for supplies, and coordinating headquarters for the whole industry, although its larger outports also assembled supplies and fish under Paspebiac's central control for the smaller stations along the coast.23 Since CRC maintained entrepreneurial control and management training within its own system, by extension if not by design it hindered the development of local entrepreneurs in the fishery. The organizational skills of the Jersey merchants, regarded with admiration and envy by observers, were a vital element in their control of the staple:

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Rien de plus beau que l'ordre, la propreté et l'économie qui régnent dans ces établissements. Aussi exige-t-on des différents commis employés dans le commerce du poisson un apprentissage régulier qui dure plusieurs années. Il n'y a pas un agent supérieur qui n'ait eu pendant longtemps la charge d'un petit établissement, où il a du donner des preuves de son activité et de sa capacité; pas un premier commis qui n'ait d'abord appris, en occupant des emplois inférieurs, à bien juger de la valeur de marchandises, de la qualité du poisson.24 Such finely concentrated control of management skills, and indeed of all organizational facets of the industry, was made possible by the spatial concentration of the industry. While the natural tendency of the timber trade was to spatial extension of the various commercial roles that operated, the natural tendency of the fish trade was to spatial concentration of those roles.25 The total concentration of production within the fishing village allowed CRC to devise and maintain a tight monopoly in the area, even over the selection of clerical staff from Jersey. The transportation of the latter from Jersey and their subsequent on-site training within the confines of the Paspébiac headquarters abrogated the need for extensive, and therefore expensive, training that would have been needed if local personnel had been used. Even the apprenticeship of clerks was tied into the merchant strategy, since their training was their payment for their services. When, in the years following 1840, CRC achieved vertical integration of the trade through a pattern of linked directorships that ran from Jersey's Gulf production centres into the supply and market centres,26 the functional integration of the industry was complete. Once the strategies for control of the staple had been devised and implemented, the fishery had achieved a concentration of power and control that was more intensive than that created in any other nineteenth-century staple. The firm became at the one time supplier, importer, distributor, producer, processor, collector, exporter, marketer, and financier of the Jersey-Gaspé fishery. The implications of this merchant strategy for income and development in the region were serious. The fishery has had a poor reputation among economists because of its inability to contribute to regional development. G. Paquet has commented that if forward, backward and final demand linkages are used to evaluate the development potential of a staple,27 then "the input of the cod economy in Canadian development has been marginal in all senses of the word." In fact, he argued, "in the list of leading sectors ranked by degree of development stimulation, fisheries are right at the bottom."28 In a study grounded in export-base theory, J.M. Gilmour looked at an area of successful staple growth (southern Ontario) and remarked that "the more favourable the production function, and the more equitably distributed the income derived

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from the export sector, the greater are the opportunities for investment in non-export activities."29 He then gave fish and timber rather poor ratings in this respect. But export-base studies, despite their useful concept of a "leading staple," have failed to examine the possibility that the inherent properties of certain export staples can constrain both the production function and the linkages and can, therefore, help to determine how the export sector affects economic development. Obviously, for example, the spatial concentration of the fishing industry on the littoral is inherent in the nature of the staple. The functional integration of the nineteenth-century merchant system, while not an inevitable consequence, was a direct response to the common-property nature of the fishery. The effective establishment of property rights over the resource through the use of the truck system was part of that response and, taken together, all these factors had serious effects on linkage formation and growth. Since the technology for processing fish in this region in the nineteenth century did not go beyond curing and drying, the forward linkage effects of the staple were minimal, the value added to the raw product at source was minimal, and little additional income accrued to the domestic economy. Backward linkage was more complex. Transportation is probably the most important backward linkage in a staple economy, particularly in a newly settled region, since it lays the basis for an integrated economy as opposed to point development in an area. In Gaspe, transportation could have taken two forms: roads and shipbuilding, both of which would have provided other sets of linkages and led to some development of the hinterland. But the cod fishery required no roads, since its communication links were the sea lanes, and so the merchants built none. In 1832, Gaspe was without any road system at all and twenty-five years later, in 1858, the Canadian Fisheries officer for the Gulf of St. Lawrence commented that "le manque absolu de chemins a empeche jusqu'a present les inhabitans de la cote d'aller s'etablir dans Tinterieur ou les terres sont unies, d'un sol excellent, et couvertes de plus beaux bois."30 Shipbuilding was developed in Gaspe in the early years, but transferred across to Jersey from the Gulf cod-trade production centres as soon as Jersey began to enter the international carrying trades of the British Empire.31 Moreover, the linkages derived from shipbuilding amounted to little more than the cutting of timber in the forests immediately beyond the fishing stations.32 While it cannot be assumed that shipbuilding, or roads, would automatically have stimulated diversification of the economy, it can be argued that without them even the preconditions of domestic development did not exist. Given the minimal forward linkages inherent in the staple and the negligible backward linkages derived from it, final demand linkages were not likely to be very promising. The size of the domestic market is obviously important here, and that in turn is dependent on how domestic income is distributed and how much of it stays in the area. If per capita income is high and equally

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distributed, then final demand linkages will be strong, since consumers will stimulate the local production of goods and services.34 If per capita income is low, subsistence (home production) will usually follow. If income per capita is unequally distributed, then luxury imports will be in demand at the higher income level while subsistence will predominate in the low income group. Because of the truck system and the concomitant import/export monopoly of the fish merchants, per capita income in the 1830s and 1840s was likely to be very low indeed, unless there were other businesses in the area to provide some broadening of the economic base. In 1833 in Gaspe County there were only ten farmers, all in the Gaspe Bay area (of whom seven were also involved in the fishery), four whalers in Gaspe Bay, five shipbuilders (one a Jersey firm), one blacksmith, two lumber merchants, five shipowners (all Jerseymen), eighteen fish merchants (of whom all but five were Jerseymen) and thirty-two major fishing establishments (of which sixteen were Jersey owned). There were also numerous small fishing stations, mostly in Jersey hands.35 During the same period, in the neighbouring area around Miramichi, where fish was not the sole staple, saw mills, grist mills, and roads developed rapidly. Northumberland County in 1830 had eighteen saw mills (1:513 persons) and thirteen grist mills (1:711 persons); in newly-formed Kent County there were eleven saw mills (1:411 persons) and nine grist mills (1:540 persons). Even Gloucester County, which had the poorest performance of the New Brunswick north shore, had six saw mills (1:1083 persons) and eight grist mills (1:812 persons): this was the county bordering the Baie des Chaleurs, directly across the Baie from Paspebiac, and with Jersey cod fisheries at Caraquet, Miscou, and Shippegan. By contrast, the whole Gaspe Peninsula had only six grist mills (1:1719 persons) and three saw mills (1:3437 persons). Gaspe County had only 0.1 percent of all households involved in saw or grist milling (0.02 percent of the population), while Bonaventure County had 0.85 percent of all households, or 0.15 percent of the population.36 The overwhelming dependence of the Gaspe area on the fisheries meant that much of the population of Gaspe operated effectively within the Jersey truck system. As Table 1 shows, the fish merchants imported and sold those articles needed for the fishery along with those items the people did not produce for themselves.37 Wages were generally low and paid in barter. Those who fished were paid either "half their catch" or three pounds per month "store payment" (truck), goods being charged at about 25 percent premium which (the risk, expenses of handling, etc., in receiving fish payment taken into account) is by no means an extravagant or too liberal a difference.38 An 1833 report distinguished between the "operative fisherman" who fished for himself and the engage, the man without ownership of the means of production in the form of essential fishing gear. The "operative fisherman" required "hooks, lines, boat, provisions" and even he, unless "very attentive and sparing," would have "very little to his credit at the end of the season."39 In effect,

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cash surpluses, which would have created final demand linkages, did not exist since, as the report explained, "Cash can scarcely be considered a circulating medium in this country, barter being the desideratum of our trade."40 Income was therefore uniformly low, as might be expected, since the fish merchants' interest was focussed not on Gaspe as a potential consumer market, but on cheap fishing and cheap labour and, most importantly, their ability to supply and control both, thereby ensuring their economic rent from the fishery. Table 1: Jersey Exports to the Fisheries; 1830s. Year 1833 1834 1835

Potatoes Flour (tons) (tons) 732 196 586 178 325 312

Biscuit (tons) 257 273 237

Pork British (barr.) salt (tons) 760 447 928 1,318 — 395

Foreign Bricks Cider salt (tons) (tales) (gall) 420 70,900 6,762 288 21,500 2,155 722 39,450 8,400

Sail Cottons Woollen Linen Worsted cloth Sails (shirts) Cloth clothing clothing Clothing Boots (yards) (yards) (yards) (articles) (articles) (articles) (articles) (pair) 1833 7,531 4,493 19,653 341 2,978 3,864 2,337 1,013 1834 7,829 4,913 17,026 53 2,866 3,743 2,005 871 1835 8,963 6,552 16,589 97 2,662 2,384 1,629 705

Year

Export (1835) Potatoes Flour Biscuit Cider Boots Shoes

Shoes (pair) 12,271 11,309 10,598

Approx. Value (£Stg.) 490 3,000 2,000 80 630 2,120

Source: Guernsey and Jersey Magazine (Jersey, 1837), 310.

What little capital existed tended to flow out of the area and back to the mother country as payment for the few luxury imports that were demanded, while no counterbalancing flow of capital accrued to Gaspe. Nor could the supply factors of rate of saving and the supply of entrepreneurial labour in this economy have enhanced development.41 A continued influx of cheap labour from Jersey and the colonial mercantile control mechanisms that operated on the coast kept incomes low while savings generated by the economy were either re-invested in the fishery or returned to Jersey in the form of salaries of Jersey labourers or merchant profits. So long as the truck system and the import/export monopoly were operating, the low-income factor had to remain

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constant. Final demand was non-existent so long as the population remained tied to dependency on the fishing firms. The merchant fishing economy of Gasp6, then, provided few opportunities for any real development. If the economy had been based on a combination of staples, of which codfish was only one, then a more satisfactory set of linkages might have developed. But the weaknesses of a single staple economy were intensified by the merchant truck system. Backward linkages, such as they were, were removed to Jersey and final demand linkages could not occur at all. Nonetheless, while the local population remained poor and the local economy even more underdeveloped than what could have been expected for the region at that time, the fishery was not an economic failure. On the contrary, it was rendered efficient and viable, since the chronic danger of dissipation of the economic rent had been avoided by the merchant strategies employed on the coast for precisely that purpose. These strategies were not conceived as a weapon of economic power designed to dominate a colony; they were perceived as necessary steps which had to be taken by a merchant enterprise if it was to secure its earnings from a common-property resource. Today, the cod fishery is being examined with great interest by provincial governments looking to achieve a strong economic base for the Atlantic region of Canada. The staple is seen as a renewable resource, high in protein and relatively cheap in an age of escalating beef prices. The dangers of the common-property nature of the resource have been recognized to a degree, and the two-hundred mile limit put in place in order to establish Canadian management of the stocks through control of access within the limited area. This strategy has been successful, at least in the short term, as catches and returns from the Atlantic fishery have increased. However, while recognition of the need to own and manage the resource at the national level has the effect of preventing international dissipation of the economic rent, it does not solve the basic problem, so much as return it to a regional level. The result has been to highlight the problems of regional management of the resource: should the northern cod stocks, for example, be processed in Newfoundland, or the Maritimes, or both? Disputes over federal/provincial jurisdiction, licensing, "over-the-side" sales and other such present-day problems of the industry are really no more than modern expressions of the age-old issue of management of a common-property resource. In a decade when the provincial government of Newfoundland has stated its intention to make the fishery the prime generator of wealth and stability in the province's future, such management conflicts must be seriously considered as must Paquet's condemnation of the fishery as "right at the bottom" in development prospects. S. Gordon has pointed out the danger to a fishing economy of the dissipation of economic rent that occurs when the resource is unregulated: "under unregulated private exploitation, they [the fisheries] can yield no rent; that can be accomplished only by methods which make them private property or public

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(government) property, in either case subject to a untried directing power."42 But, while his model is theoretically interesting, it empirically fails to predict the ingenuity of capitalists in establishing property rights and protecting economic rent without declaring them "private property." This case study of the Jersey merchants shows just how effective the industry became under their ingenious version of "unregulated private exploitation," which they developed into a "unified directing power" in the Gulf fisheries. At the same time it also warns that the local population may be shorn of the benefits derived from the resource in the process. Fisheries development policy is likely to take one of two directions in the future. One is to support large private firms, with the government's role being primarily regulatory; the other is for the government to take a far greater role in controlling catching, processing, and marketing. Either strategy attempts to wrestle with the common-property nature of the resource, and both are fraught with problems. In the case of private management there is a real danger that, while the industry might become efficient and profitable, the profits from the fishery would benefit only the industry rather than the population and the region, as happened in nineteenth-century Gaspe. In the case of greater government control, there is the danger of disarticulation, disorientation and lost control.43 A recent provincial white paper has stated: It must be recognised that both the Federal and Provincial Governments, plant workers, and the private sector, which includes fishermen, all have a role to play at influencing and directing the course of development within the fisheries sector. It is essential, therefore, that various interest group conflicts be minimized and that the appropriate measures be taken to ensure that benefits accruing from the exploitation of fish stocks are consistent with rational resource management objectives and desirable socioeconomic considerations.44 Thus, the nineteenth-century paradox of poverty in the midst of resource plenty is analagous to the twentieth-century dilemma of fisheries management. The challenge facing the Atlantic region today is quite literally that of attempting to fly in the face of history, of trying to prevent the usual "tragedy of the commons,"45 of succeeding in capturing the economic rewards of the fish staple without depriving the region's people of its benefits.

Notes [1] H.A. Innis, The Cod Fisheries (Toronto, 1954), 194, 494, 502. [2] Economic rent, or "sustainable resource rent" in the fishery may be defined simply as "the difference between total harvesting cost and sus-

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tainable revenue"; see G.R. Munro, A Promise of Abundance: Extended Fisheries Jurisdiction and the Newfoundland Economy, report prepared for the Economic Council of Canada, (Hull, Quebec, 1980), esp. 11-2, 88-9, fn. 8. See also J. Robinson, The Economics of Imperfect Competition (London, 1954), 102; and H. S. Gordon, "The Economic Theory of a Common-Property Resource: the Fishery," Journal of Political Economy (1954) 62:130-2. [3] H. S. Gordon, "The Economic Theory," 124-42. [4] See, for example, P.A. Thornton, "The Demographic and Mercantile Bases of Initial Permanent Settlement in the Strait of Belle Isle," in J.J. Mannion ed., The Peopling of Newfoundland (St. John's, 1977), 15283; F.W. Remiggi, "Ethnic Diversity and Settler Location on the Eastern Lower North Shore of Quebec," in ibid., 184-211; P. Charest, "Le Peoplement Permanent de la Basse-Cote-Nord du Saint-Laurent: 1820-1900" Recherches Sociographiques, nos. 1 and 2 (Quebec, 1970); P. Hubert, Les lies de la Madeleine et les Madelinots (Rimouski, 1926); C. G. Head, Eighteenth Century Newfoundland, A Geographer's Perspective (Toronto, 1976); and R.E. Ommer, "From Outpost to Outport: the Jersey Merchant Triangle in the Nineteenth Century" (Ph.D. thesis, McGill University, 1979). The banks fishery, with its different pattern of exploitation, is not considered in this paper. [5] "Journal of Charles Robin," original in the Societe Jersiaise, St. Helier, Jersey; copy in the Public Archives of Canada, MG23 Gill, n.p. [6] Haldimand Collection, Report on the Canadian Archives, 1888 (Ottawa, 1889), B202, 1774-1784, 30ff. [7] Census of Canada, 1931, recap., vol. 1, 133-53. See also Ommer, "From Outpost to Outport," 77-80 and 180-4 for a more detailed discussion of early settlement on the Gaspe coast and for detailed empirical evidence of the theoretical argument contained in this paper. [8] Report on the Canadian Archives, 30. [9] G. Handcock, "English Migration to Newfoundland," in Mannion, The Peopling of Newfoundland, 16-8. [10] Charles Robin to Fiott de Gruchy, 6 September 1792, Letterbook I, Charles Robin and Company Letterbooks, copy in the possession of the family of the late A. LeGros of Paspebiac. These Letterbooks are now lodged in the Public Archives of Canada (Ottawa) and there are microfilm copies in the Public Archives of Nova Scotia. In monetary terms coastal

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R.E. Ommer land was cheap since most of it was in title of the Crown and available by grant. Its real value lay in the right to the fishery which it conferred.

[11] "Journal of Charles Robin," entry of 2 June 1767. [12] H.C. Pentland, "The Role of Capital in Canadian Economic Development before 1815," Canadian Journal of Economics and Political Science (1950) 16:461. [13] C. Robin, quoted in A.C. Saunders, Jersey in the 18th and 19th Centuries (Jersey, 1930), 214. [14] Ibid. [15] Profits have not yet been calculated for CRC. Although it should be possible to use the firm's ledgers to assess the finances of the Canadian end of the business, total profits will probably not be calculable since the firm also operated in the Caribbean, Latin America and the Mediterranean. It also had a branch in Liverpool and commission agents in London (up to 1840) as well as business headquarters in Jersey itself. Documents for these other sectors of the business have not been found, despite extensive searches by the author in Jersey and England. Some idea of the nature of capital flows and exports from Paspebiac can be found in Ommer, "Prom Outpost to Outport," 99-175. [16] See, for example, the letter from Jersey headquarters to Pasebiac headquarters, 14 March 1854, CRC Letterbooks, volume for 1834-58. There are numerous examples of such calculations throughout the Letterbooks of the firm. This reference reads: "You will pay fish the same as last year's in barters,. . . and not have Fauvel and LeBoutillier to consult together to fix our price." [17] Paspebiac headquarters to J. Robin, 10 December 1845, ibid. [18] There is a strong parallel to be drawn here with the truck system operated by Scottish merchants in the Piedmont region of colonial America. Essentially both these systems recognised that although many very small producers, operating independently, cannot make much profit, substantial profits can be made if some way of aggregating the individual returns can be devised. See M. Egnal and J.A. Ernst, "An Economic Interpretation of the American Revolution," William and Mary, Quarterly, 3rd ser. (1972), 29:3-32. [19] See Ommer, "Prom Outpost to Outport," 185-200, for a more detailed discussion.

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[20] Even the fur trade was not so compromised by unprotected rent. The sheer distances involved limited access, since heavy capital demands were made through the operation of extended supply lines and overextension of these supply lines was a common reason for commercial failure. In the fishery, ease of access was (and is) not hindered by great distances; the problem here is not entry, but the capacity to remain in the business over an extended period. [21] J.E. Vance. Jr., The Merchant's World: the Geography of Wholesaling (New Jersey, 1970), 4. [22] Indeed, even when a small firm overproduced codfish beyond its vessels' carrying capacity, the only outlet to market for the excess freight (as late as 1844) was on another Jersey merchant's vessels. Such arrangements are commonplace in the CRC Letterbooks. See also the "Agreement of the 15th October 1844" between the Perree firm of Gaso and Pruing and Sons, Perree Papers, Societe Jersiaise, St. Helier, Jersey. Perree agreed to freight 700 quintals of dry cod, along with sundries and passengers, at a cost of 2s per quintal and £3 10s per passengers. See also Ommer. "Prom Outpost to Outport," 200-1, 220. [23] Report of P. Fort in on the Gulf of St. Lawrence Fisheries for the year 1860, United Province of Canada, Sessional Papers (1861), A33. See also Paspebiac agent to Creighton and Grassie, 16 June 1840, CRC Letterbooks, volume for 1834-58. [24] Report of P. Fortin for the year 1857. United Province of Canada, Sessional Papers (1858), A31. See also Innis, The Cod Fisheries, 278-9. [25] See G. Wynn, "Industrialism, Entrepreneurship and Opportunity in the New Brunswick Timber Trade," in L.R. Fischer and E.W. Sager eds., The Enterprising Canadians: Entrepreneurs and Economic Development in Eastern Canada, 1820-1914 (St. John's, 1979), 10-13. [26] Ommer, "From Outpost to Outport," 46 and 154. [27] M.H. Watkins, "A Staple Theory of Economic Growth," Canadian Journal of Economics and Political Science (1963) 29:55, defines forward linkage as "a measure of the inducement to invest in industries using the output of the export industry as an input," backward linkage as "a measure of the inducement to invest in the home production of inputs, including capital goods, for the expanding export sector," and final demand linkage as "a measure of the inducement to invest in domestic industries producing consumer goods for factors in the export sector."

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[28] G. Paquet, "Some Views on the Pattern of Economic Development," in T.N. Brewis ed., Growth and the Canadian Economy (Toronto, 1968), 44. [29] J.M. Gilmour, Spatial Evolution of Manufacturing, Southern Ontario, 1851-1891 (Toronto, 1972), 60. [30] J.D. McConnell to F.W. Baddely, Quebec Mercury, 18 November 1833: Report of P. Fortin for year 1857, United Province of Canada, Sessional Papers (1858), A31. [31] See Ommer, "Nouvelles de Men the Rise of Jersey Shipping, 1830-1840," in Fischer and Sager eds., The Enterprising Canadians, 173-4. [32] Ibid. 173. [33] Other backward linkages, such as the making of tubs, gear, and so forth, were also restricted and in some cases completely removed from the coast to Jersey. See Ommer, "The Trade and Navigation of the Island," in D. Alexander and R.E. Ommer, eds., Volumes Not Values: Canadian Sailing Ships and World Trades (St. John's, 1979), 33-61, for a detailed discussion of linkage removal to the metropole. [34] Watkins, "A Staple Theory of Economic Growth," 55; D.C. North, "Location Theory and Regional Economic Growth," Journal of Political Economy (1955) 63:243-58; J.M. Gilmour, Spatial Evolution of Manufacturing, esp. ch. 2; and R.E. Baldwin, "Patterns of Development in NewlySettled Regions," Manchester School of Economic and Social Studies (1956) 24:161-79. [35] J.D. McConnell to F.W. Baddely, op. cit. This report was used to compile the above description. [36] R. Cooney, A Compendious History of the Northern Parts of the Province of New Brunswick and of the District of Gaspe in Lower Canada (reprint Chatham, 1896), 278-9; and Lower Canada, Census and Statistical Returns, 1831, returns for Gaspe County and Bonaventure County. For demographic and agricultural data, and further analysis, see R.E. Ommer, "From Outpost to Outport," 210-22. [37] McConnell to Baddely, op. cit.; Guernsey and Jersey Magazine (Jersey, 1837), 310. [38] McConnell to Baddely, op. cit. "Premium" means that store goods were sold at 25 percent above their actual value. This was not seen as a profit but as a way of covering the costs incurred in handling fish bought from local fishermen in a barter transaction.

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[39] Ibid. [40] Ibid. [41] Baldwin, "Patterns of Development," 161-79, argued that the price of the export staple and the "array of factor prices" at the metropole would greatly influence the production function of the staple, which would in turn have a strong impact on later development of the newly settled region, since the production function initially influenced "the nature of the labour and capital supply which flows into each region and the distribution of each economy's national income." In the case of the cod fishery, the export commodity was of low value, the capital requirements relatively low (although beyond the local fisherman), and labour cheap. [42] Gordon, "The Economic Theory," 135. [43] See Alexander, The Decay of Trade (St. John's, 1977) for a demonstration of this in the Newfoundland fishery in the mid-twentieth century. [44] Government of Newfoundland and Labrador, White Paper on Strategies and Programs for Fisheries Development to 1985 (St. John's, 1978), 2. [45] J. Baden and G.J. Hardin, eds., Managing the Commons (San Francisco, 1977), 16-30.

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The New Brunswick Economy in the Nineteenth Century P.D. MCCLELLAND The central problem of the thesis is the retardation of regional growth. The economy of New Brunswick has provided a case in point for over a hundred years. This is to say, real per capita income within the province has tended to lag behind that achieved in competing regions. This competition has been viewed primarily as a scramble for factors of production. The winners were those areas which attracted factors from lagging sectors whenever income differentials became significant. The losers, in turn, could find in such an exodus a major reason why retardation developed cumulative tendencies. The choice of New Brunswick, as implied above, was partly determined by the proven capacity of the province to stagnate. The region also seemed defensible as a unit of observation. Within its borders, economic activities possessed a certain homogeneity; beyond its borders these activities were sufficiently different to justify confining analysis to the province per se. The objective has been to study not merely retardation but those conditions which first gave the New Brunswick economy its retarding tendencies. The period in question therefore has to be the nineteenth century—a century when regions competing against New Brunswick lay to the south-southwest. Not until the twentieth century did central and western Canada become those greener pastures which attracted New Brunswick factors in significant volume. The time-honoured approach to Canadian regional growth is by way of the staple theory. Unfortunately, such an approach could never quite adequately describe New Brunswick developments of the nineteenth century. The province did have a staple; namely, timber. But the central determinant of New Brunswick prosperity was usually viewed as being not lumber, but wooden-ship construction. This latter industry has even been labelled "the linchpin" of maritime prosperity by C.R. Fay and H. Innis.1 To remove the pin was necessarily to precipitate the economic disintegration of the region. The dubious procedure of squeezing wooden ships into the staple format will not be discussed here. What will be challenged is the assertion that ships— staple or otherwise— were a central determinant of secular tendencies within the province. That role belongs to lumber, and to lumber in unfinished form. This is not to give unqualified support to the methodology of H. Innis. If anything, subsequent analysis will attempt to show the severe limits of that approach. Timber did foster economic growth in New Brunswick, but only Source: P.D. McClelland, "The New Brunswick Economy in the Nineteenth Century/' Journal of Economic History (1965) 25:686-70. This is a summary of the author's doctoral dissertation, The New Brunswick Economy in the Nineteenth Century (Cambridge, Mass., 1967).

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for a brief period and under special circumstances. The end result was not sustained growth but progressive retardation. The chronology, in broadest outline, is as follows. During the eighteenth century, New Brunswick's forests supplied little more than local timber requirements plus a few masts for the British navy. The key to initial prosperity was the Continental Blockade of Baltic timber supplies during the Napoleonic Wars. The British response was to impose a system of preferential duties designed to encourage colonial production. For New Brunswick, the result was considerable secular growth from the time that such duties were first implemented until their modification in the 1840s. Superimposed on this secular tendency were marked cyclical swings. British demand was price inelastic and subject to rapid shifts. Colonial suppliers faced conditions of roughly constant costs but responded with a lag because of the time required to receive market information and to move the logs from interior forest to the docks of London and Liverpool. The inevitable result was a price structure of wild oscillations, with all that such oscillations implied for the earnings of factors employed in the timber industry. From the earliest times, it was a gambling trade. The decade of the 1840s proved to be decisive in two ways. To the south, the acceleration in American economic growth implied the necessity for a similar development in New Brunswick if the latter were to continue to attract and hold productive resources. Secular tendencies within the province were just the reverse. Reliance on a staple was providing no guarantee of sustained economic expansion. Much of colonial preference was being swept away by British enthusiasm for free trade. Alternative foreign markets did not develop to any significant degree—not in the 1840s, and not for the rest of the century. Also of growing importance were the increasing costs associated with depletion. Coupled with limited technological progress and increased foreign competition, they implied growing pressures on the returns to factors in this, the major industry of the province. Other sectors of the economy were not capable of offsetting these developments. Indeed, at no time during the century could provincial factors find locally high-paying alternatives capable of significantly raising total regional income. Economic growth, if it came at all, came as a result of the exploitation of forest resources. The initial swing of secular forces against New Brunswick can therefore be traced to events which preceded that great upsurge in local shipbuilding between 1850 and 1875. If one were prepared to regard wooden ships as processed timber, the linkage of economic expansion to a staple might still be preserved—albeit in mutilated form. The question is whether the upsurge in ship construction actually did reverse the secular tendencies of the 1840s. The very cyclical nature of shipbuilding should raise certain doubts. The market for softwood square-riggers was even more unstable than that for timber, and for similar reasons. The sequence for prosperity and collapse which

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these two industries fostered in the province not only created difficulties for capital accumulation but served to mask in some degree the movement of secular forces against the region. If one considers the average tonnage launched between 1850 and 1875, the shipbuilding industry by itself cannot be regarded as a major sector of the economy. In 1870 (a near-average year) employment in shipyards was 1.6 percent of the labour force: value added was roughly 2 percent of the estimated gross regional product of $36 million. Smallness of size is of course no necessary proof of economic unimportance. Returns to factors can be increased if a given industry fosters the exploitation of potential economies of scale. However, that potential in the industry of softwood ship construction was quite limited. In addition, shipbuilding production functions which have been estimated indicated the consumption of domestic inputs created few external economies elsewhere in New Brunswick. About 35 percent of total construction costs went for direct labour. Another 30 percent to 40 percent went for timber in a variety of forms. The latter percentages suggest the possibility of a pecuniary external economy, especially given that sawmills were subject to moderate economies of scale. But if one estimates two numbers—(1) the value of timber consumed in ship construction, and (2) the value of lumber which newly-built ships freighted to Great Britain on their maiden voyage—the sum of these two, even during peak building years, was roughly 10 percent or less of total sawmill production within New Brunswick. As for other inputs, they were primarily of two kinds. Some were imported in finished form—chains and anchors particularly. Others were imported as raw material, such as iron and cordage, and then reworked into acceptable form by domestic producers. This reworking was conducted by small-scale units, many of them consisting of a blacksmith and a forge located in the shipyard itself. The conclusion is fairly evident. With respect to the consumption of domestic inputs, shipbuilding created few pecuniary external economies in the province of New Brunswick. The case of the forward linkage to ship owning is more obscure. The great rise in New Brunswick ship owning occurred between 1860 and 1875. In a number of direct and indirect ways, the existence of local shipbuilding stimulated this development. Just how much it stimulated is difficult to say. But in so far as shipbuilding did contribute to the upsurge in ship ownership, it fostered the expansion of a sector which was of dubious value to the long-run economic growth of the province. Prom the outset, New Brunswick owners were at a competitive disadvantage in acquiring ocean freights in a world of trade routes centered far beyond New Brunswick borders. Surviving company records indicated that ship-owning profits were highly irregular. Like shipbuilding and timber trade, the operation of sailing vessels was essentially a gambling occupation. In the long run, most of the New Brunswick gamblers lost. The reason was their failure to anticipate correctly the course of technological progress.

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Throughout the 1860s alternative means of ocean transportation were being perfected—notably, the steamship and the iron sailing vessel. The combined force of the two was to prove totally disruptive. After 1865, British demand for New Brunswick vessels almost disappeared. By 1875, a decade later, the wooden square-rigger was virtually obsolete. And yet between 1870 and 1879, New Brunswick owners acquired an estimated two hundred thousand tons (gross) of softwood vessels. This represented an investment of the order of $8 million—a considerable sum for a region with an annual income of approximately $36 million. Therefore, in so far as shipbuilding contributed to these events, it helped to redirect the flow of domestic savings into assets which were shortly to become technologically obsolete. The industry of constructing wooden vessels therefore does not seem to have offered a palliative for those long-term secular difficulties which first became evident in the 1840s. The demand for softwood clippers burst upon the province in a series of three spectacular waves between 1850 and 1875 but left virtually unchanged those basic undercurrents which were determining the economic fate of the region. For much of the century the province was therefore losing out in the competition for factors of production. Time constraints prevent the exploration of the economics of retardation. Suffice it to observe that factors tended to leave New Brunswick in a manner which reinforced retarding tendencies. Capital departed more readily than labour; the young and enterprising proved more responsive to income differentials than the older, conservative elements. Nothing occurred after 1840 which significantly reversed this trend. By 1895—on the eve of the great upsurge in Canadian economic growth—New Brunswick had become a region of marked retardation within the North American economy. To this point, retardation had been defined mainly in terms of more attractive opportunities to the south. Now competitive regions were to include central and western Canada. But for New Brunswick such competition merely helped to reinforce the lagging tendencies which had already been clearly established. By way of summary: the major resource of the New Brunswick economy throughout the nineteenth century was timber. Whatever sustained growth did occur in the province had as its primary driving force the exploitation of this resource. But if a staple was the fulcrum to growth, it provided no guarantee that such growth would be sustained indefinitely. If anything, it trapped resources into an area under the artificial stimulation of colonial preference. In later retardation one can detect an aura of the inevitable—in part because of increasing costs associated with depletion; in part because British markets could not be expected to remain protected indefinitely; and in part because the province simply did not have lucrative alternatives whenever the above difficulties began seriously to impinge on factor earnings. In all of this, the role of wooden shipbuilding was peripheral. As a nineteenth-century New Brunswick occupation, it was not critical to secular growth nor was its collapse a necessary

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element in subsequent retardation. What claim it has to preeminence in the literature must ultimately rest more on the romantic qualities of the industry than on its function as a linchpin of New Brunswick prosperity.

Notes [1] J.H. Rose, A.P. Newton and E.. Benians (eds.), The Cambridge History of the British Empire, vol. 6 (New York, 1930), 663.

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Why Was Specie Scarce in Colonial Economies? An Analysis of the Canadian Currency, 1796-1830 A. REDISH The monetary history of many British colonies, particularly those in new lands, has centred on a chronic scarcity of specie that is said to have characterized their monetary systems. The colonists themselves frequently complained of such a shortage, and blamed it on an external drain arising from an (apparently) insatiable demand for imports. This explanation has been accepted by many monetary historians and forms the core of theories explaining the emergence of banking systems. B. Hammond, commenting on the American banking system said: "[Early banks] arose from the need of a medium of exchange and a legal tender in the absence of specie, which the need of imports kept driving away. For as fast as specie was received, it was exported for goods that could not be produced at home."1 This model of an external drain, however, contradicts modern theories of international trade and finance. Since at least the mid-eighteenth century, economists have argued that, in the long run, the world's supply of specie will automatically distribute itself among nations so that each will be in monetary equilibrium.2 This paper examines the monetary history of Canada in the early nineteenth century in an attempt to determine the cause of the observed absence of specie and to resolve this conflict between economic theory and monetary history. The early monetary history of Canada has been described as the chronicle of a search for substitutes to compensate for the lack of specie metals.3 It is argued here, in contrast, that the Canadian coinage was lacking in quality rather than in quantity. As shown below, there were few gold coins in circulation, and both gold coins and some silver coins could be obtained only at a premium. The coins in circulation were predominantly old French coins (no longer accepted in France), whose weight had been reduced by clipping, and some small Spanish silver coins. It is shown that this situation arose from a combination of Gresham's Law and the currency laws of the Canadian colonies.

The Canadian Economy, 1796-1830 In 1791, the British colony of Quebec was divided into two colonies, Upper and Lower Canada, which are now approximately the provinces of Ontario Source: A. Redish, "Why Was Specie Scarce in Colonial Economies? An Analysis of the Canadian Currency, 1796-1830," Journal of Economic History (1984) 44:713-28. Reprinted with permission.

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and Quebec.4 Upper Canada was largely uninhabited in 1791, but migration, notably that of Late Loyalists from the United States, quickly provided an English-speaking population. The population of Lower Canada was largely French-speaking and its growth came mainly from natural increase. In 1790 the population of the Canadas was estimated to be 161,311; however, by 1831 there were reported to be 236,702 people in Upper Canada and 553,134 in Lower Canada.5 The combination of comparative advantage and British regulation of colonial trade ensured that Britain was the main trading partner of the Canadas. The dominant export of the Lower Province was furs, until 1810 when timber products became more significant. Upper Canada had no ocean port but exported ashes, timber, and wheat to Britain via Lower Canada. The money stock during the period 1796 to 1830 was composed of coinage, "Army Bills," bank notes, and a small quantity of miscellaneous paper money. Until 1830 the currency laws of the two provinces were identical, and the laws passed in 1796 (in Upper Canada, 36 Geo. Ill c. 1. and in Lower Canada, 36 Geo. Ill c. 5) were in effect throughout the period with only minor amendments. The acts of 1796 made a wide variety of coins—gold and silver from England, Prance, Spain, Portugal and the United States legal tender in the Canadas. In addition, each coin was given a legal tender rating in pounds currency. The Halifax pound currency (£ cy.) was the legal unit of account; there was no mint in the Canadas, however, and no coins were ever issued in that unit. Various Army Bill acts passed between 1811 and 1815 permitted an issue of paper money that was legal tender.6 The first act permitted the commander of the British forces in the Canadas to issue a maximum of .£250,000 cy. in bills of various denominations. Although the accounting for these bills was in pound currency, they were issued in dollar denominations with an exchange rate of $4 to £1 cy. The larger bills ($25 or more) on which interest at 4 percent per annum was paid, were payable on demand "in Cash or in government bills of exchange in London at thirty days sight, at the current rate of exchange." The smaller bills (primarily of $4 face value) were redeemable in coin on demand at the Army Bill Office. Subsequently amendments raised the maximum permissible issue to £1,500,000 cy. ($6 million), of which approximately £1,250,000 cy. was issued. The total of small bills appears to have been approximately £500,000 cy. In March 1815 the imperial authorities called in the bills and declared that no further interest would be paid. During the next fourteen months all but £20,000 cy. was redeemed, and in 1820 the government closed the redemption office. The small bills issued under the amendment of 1814 were not redeemable in coin but in bills of exchange on London; yet there is no evidence that they depreciated in specie terms, and Maclvor suggests that "they did much to restore the confidence of the population in paper money."7 The first bank in the Canadas was the Bank of Montreal established under Articles of Association in 1817.8 The following year two additional banks were

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established, the Bank of Canada and the Bank of Quebec. All three obtained charters in 1821 or 1822. In Upper Canada a private bank in Kingston, the Bank of Upper Canada (which became known as the "Pretended" Bank of Upper Canada), began business in 1818. The bank failed in 1822. Meanwhile, Toronto merchants obtained a charter and opened another and different Bank of Upper Canada there in 1821. No other bank was in business in Upper Canada before 1830. The banks1 functions were to issue notes, to lend on "real bills," to purchase government bonds, and to deal in bills of exchange on London. In 1830 the total amount of notes in circulation was £385,137 cy.9 The extent of the circulation of other paper monies is unknown. A. Shortt suggests that before 1810 there was little circulation of foreign bank notes, as it was not illegal to circulate counterfeit issues.10 After 1810, it is probable that a quantity of American bank notes circulated in Canada. It is also likely that bills of exchange with multiple endorsements circulated. The colonists frequently complained about their monetary system, asserting that the colony suffered from a scarcity of specie caused by a perennial external drain. Earliest references to the problem were in the late seventeenth century. This paper focusses on the early nineteenth century, however, primarily because the higher level of development of the colony provides more sources of evidence on the state of the currency. In 1792, legislatures were established in both Upper and Lower Canada and petitions to the legislature and legislative inquiries provide considerable information on early Canadian currency. These petitions and inquiries frequently were made by groups interested in obtaining bank charters. The earliest record of an attempt to open a Canadian bank is of one made in 1792 by a group of Montreal merchants. They inserted the following advertisement in the Quebec Gazette: The undersigned, having experienced great inconvenience in Canada from the deficiency of specie or some other medium to represent the increasing circulation of the Country, as well as from the variety of the money now current, and knowing the frequent loss and general difficulty attending receipts and payments, have formed the resolution of establishing a Bank of Montreal, under the name of the "Canada Banking Company."11 Nothing further was heard from this company, and the next attempt to begin banking, in 1808, was similarly stillborn. Our knowledge comes from a petition to the Lower Canada legislature by merchants wishing to incorporate under the title Bank of Canada, because: "The commerce and agriculture of this Province labour under many inconveniences and discouragements from the quantity of specie in circulation being greatly inadequate to its necessities and increasing population."12 There were similar complaints in Upper Canada. In 1794 the Lieutenant Governor of Upper Canada suggested in a report to the Lords of

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Trade that a paper currency be issued. He commented that "the necessity of a paper currency where there is not sufficient gold or silver is most obvious."13 In March 1817, a petition presented to the legislature from some York merchants stated that "[there was] great inconvenience previous to the issuing of Army Bills from the want of a circulating medium, and like disadvantage will soon again become oppressive unless some such accommodation is established upon a secure and permanent foundation."14 An application of Kingston merchants for a bank charter in January 1817 had almost identical wording.15 The Kingston Chronicle (27 August 1819) supported the idea of a chartered bank, since it would provide a circulating medium "not likely to be drained off like specie, and equally useful for all the purposes of inland trade." Finally, to cement the impression, there is the report of a committee of the Upper Canadian Legislature in 1821, established to investigate a proposed Provincial Bank of Issue. The report stated that: "the establishment of a provincial bank under proper restriction would be beneficial to the country by remedying the great want of specie by securing to ourselves whatever advantages are to be derived from the issue of a paper currency."16

Gresham's Law and the Canadian Currency The preceding evidence clearly indicates that Canadian colonists perceived a shortage of metallic currency. It will be argued here that the major part of the problem was not the quantity but the quality of the specie in circulation. The coins that circulated were primarily clipped silver coins of relatively low value. Coins of full weight and gold coins could only be obtained at a premium. This situation was caused not by an insatiable demand for imports but by currency laws that imposed a "multi-coin standard." A multi-coin standard is defined here as a system in which many coins (that is, more than one gold coin, one silver coin, and their fractional parts) are given ratings in a unit of account and are legal tender at those ratings. This kind of monetary system is similar to a bimetallic standard in that while de jure there is more than one money, de facto one will tend to drive out the others. This is an application of Gresham's Law. The usual definition of Gresham's Law is that "bad money drives out good." In 1932, F.W. Fetter, after noting that in fact Gresham never made such a statement, suggested that the Law required rather careful definition.17 He argued that driving out might occur in one of three ways: 1. All of the good money may be driven from circulation as was the case with the gold coins in France and Germany during the World War, and the bad money go to a discount. 2. Some of the good money may still circulate, and the bad money (being limited in amount) remain on a parity with it,

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as the silver dollar in the United States remained on a parity with the gold dollar in the 1890s. 3. The good money may still circulate, but only at a premium in terms of bad money, as was the case with the gold dollar in the United States during the Greenback period, or the gold peso in Chile from 1898 to 1926.18 Adding to this a definition of a "good money" (one that has a higher intrinsic value but the same monetary value as another form of money) Fetter provides a comprehensive definition of Gresham's Law. Yet even thus expanded, there are some unsatisfactory aspects of the Law. In case 1 above, Fetter suggests that good money leaves circulation (through hoarding or export) and bad money goes to a discount. Yet the legal tender value of bad money is fixed, implying that it cannot (domestically) go to a discount. The Law needs further clarification since it does not tell us why in some instances (case 1) the good money is driven out of circulation completely, whereas in other instances (case 3), the good money circulates at a premium. M. Friedman and A. Schwartz noticed this phenomenon during the Greenback period: gold coins circulated at a premium and silver coins were driven from circulation.19 They concluded that: "Greenbacks drove out subsidiary silver and required the introduction of fractional money, since subsidiary silver retained its monetary usefulness only so long as it exchanged at its nominal value." The crucial difference then between gold and silver coins lay in their different sources of monetary usefulness. Silver was useful for small payments, gold coins for larger payments. If there were fixed costs to establishing a market for the good money, gold coins could bear the cost, but it was prohibitive for the lower-valued silver coins. The above description of Gresham's Law pertains to a world in which all coins in circulation remain in mint condition. Since this is not an accurate description of colonial Canadian currency, two further qualifications are required. First, if coins circulate by tale rather than by weight, a coin undervalued by law could still become a "bad money" if its weight were reduced by clipping or sweating. It is thus the actual weight rather than the mint specifications that must be used to determine what coins are undervalued.20 Second, the existence of both clipped and counterfeit coins introduces problems of uncertainty, and the result is that these poor quality coins will dominate the circulation and "good coins" will be scarce.21 The first step in the analysis of Canadian currency in the early nineteenth century is to examine in detail the currency laws and their implications. As stated above, the acts of 1796 were in effect throughout the period 1796-1830, although there were minor modifications in 1808-1809 and in 1826, which will be discussed below. Three provisions of the acts are relevant: the ratings

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A. Redish Table 1: Value of Gold Coins, 1796

Gold Coins Guinea (British) Johannes (Portuguese) Moidore (Portuguese) 4 Pistole (Spanish) Louis d'or (French) Pistole (Spanish) Eagle (American)

Standard weight0 (in grains) 126 432 162 408 124 100 270

Fineness6 (in carats) 22. 22. 22. 21.5 21.5 21.5 22.

Official value (£ cy.) 23s. 4d. 80s. 30s. 74s. 22s. 6d. 18s. 50s.

Grains fine gold (per £ cy.) 99.0 99.0 99.0 98.8 99.7 99.5 99.0

Sources: For standard weight and official value (in Halifax currency), Lower Canada, Statutes, 36 Geo. Ill c. 5; Upper Canada, Statutes, 36 Geo. Ill c. 1. For fineness,

P. Kelly, The Universal Cambist (London, 1821).

a 6

Standard weight of each coin in English grains: 5760 grains/troy oz. Fineness in carats: pure gold is 24 carat fine.

assigned to each coin, the provision for large payments to be made by weighed coins, and provisions for deductions in legal tender value for light coins. Combining the rating of the coins in the acts with knowledge of their physical characteristics permits the determination of which coins were relatively underrated. Seven gold coins were given legal tender status as shown in Table 1, which also states the fineness and weight of each coin. It is straightforward to calculate the number of grains of fine (pure) metal in coins worth £1 cy. As the table shows, the number of grains is roughly equal for all coins, which implies that none are significantly undervalued. This exercise was repeated for the silver coins given legal tender status and currency ratings. The calculations, shown in Table 2, yield a wide variation in the number of grains of fine silver per pound currency. All silver coins were undervalued relative to the Spanish pistareen (sometimes referred to as a peseta or two-real piece). The most severe undervaluation was that of British silver coinage, followed by the Spanish and American dollars. The final calculation required to determine which coins were undervalued is a comparison of the gold and silver coinage. This comparison requires a knowledge of the relative market values of gold and silver, which is provided by Soetbeer's data based on Hamburg market prices.22 Over the period 1796 to 1830, the mean ratio is 15.63 and the maximum and minimum are 15.04 and 16.25. In Table 3 the silver equivalent of each gold coin is calculated for these three ratios (the maximum, minimum, and mean); however, the discussion following assumes that individuals used the mean (1 ounce of gold is worth

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Analysis of the Canadian Currency Table 2: Value of Silver Coins, 1796

Silver Coins Crown (British) Shilling (British) Dollar (Spanish) Pistareen (Spanish) Crown (French) Piece de f4 lOs(French) Piece de 36s(French) Piece de 24s(French) Dollar (American)

Standard weight (in grains) 464.5 92.9 416.0 90.0 450.0 337.5 138.0 92.0 416.0

Fine weight (in grains) 429.7 85.9 370.9 72.2 403.1 302.3 125.1 83.4 373.5

Official value (£ cy.) 5s. 6d. Is. Id. 5s. Is. 5s. 6d. 4s. 2d. Is. 8d. Is. Id. 5s.

Grains fine silver (per /cy.) 1562.5 1585.8 1483.6 1444.0 1465.8 1451.0 1501.2 1539.7 1494.0

Sources: for official value see Statutes, see Table 1. Standard and fine weights, see Kelly, Cambist, 12-169.

15.63 ounces of silver) as their predictor of the relative value of the two metals over the entire period. It follows immediately from the table that all the gold coins were undervalued by the acts of 1796. Simply put, a debt of £1 cy. could be paid in pistareens containing 1,444 grains of silver or louis d'or containing gold worth 1,543 grains of silver. The louis d'or was undervalued by 7 percent. The acts contained further provisions relating to payments in gold. If a payment was made in gold coin, a sum of 2y4d. cy. would be deducted for each grain that the coin weighed less than the standard weight; thus, there would be no incentive to clip gold coins (that would be weighed). In addition, if payments over £50 cy. were to be made in gold coin, either party to the transaction could request that payment be made in bulk—the total payment would be weighed and evaluated at 89s. cy. per troy ounce of British, American, or Portuguese gold and 87s. cy. per troy ounce of Spanish and French gold. These evaluations imply 98.88 and 98.87 grains per pound currency. This still represents an undervaluation of the gold coinage, and in addition a deduction of two-thirds of a grain troy was made for each piece of gold coin so weighed, "as a compensation to the receiver or receivers for the loss that may accrue to him, her, or them, in afterwards paying away the same by the single piece." There were no provisions in the acts for the weighing of silver coins, which implies that an individual would not be penalized for circulating a clipped silver coin. Since this paper analyses Canadian currency from 1796 to 1830, the legislative changes of 1808-09 (Lower Canada, 48 Geo. Ill c. 8; Upper Canada, 49

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A. Redish Table 3: Silver Equivalent of Gold Coins (in grains of silver per £ cy.)

Gold Coin Guinea Johannes Moidore 4 Pistole Louis d'or Pistole Eagle

1 gold = 15.04 silver 1,488.96 1,488.96 1,488.96 1,485.95 1,484.45 1,496.48 1,488.96

1 gold = 16.25 silver 1,608.75 1,608.75 1,608.75 1,605.50 1,603.87 1,616.87 1,608.75

1 gold = 15.63 silver 1,547.31 1,547.31 1,547.31 1,544.19 1,542.62 1,555.13 1,547.31

Sources: Tables 1 and 2 and text.

Geo. Ill c. 8) must be examined. These acts affected only gold coinage. They increased the official rating of the four-pistole piece to £3 14s. 6d., of the louis d'or to £1 2s. 8d., and of the pistole to 18s. 3d. The minimum £20 cy. and the value of French and Spanish gold were raised to 87s. 8%d. Finally, light Spanish and French gold coins were to be reduced by 2y5d. cy. for every grain that they were underweight. By calculations similar to those above, it can be seen that these regulations affected only the degree of undervaluation of the French and Spanish gold coins. In 1816, the British determined to make the crown and the shilling token coins, so they reduced their fine weight and maintained their official values and, in Britain, made the coins legal tender only to a maximum of 40s. stg. In Canada their legal-tender was not restricted, but they were still undervalued with respect to the pistareen and most French silver. In 1826, the colonial governments raised the rating of the token shilling and crown to Is. 2d. and 5s. 9d.23 This was an attempt to overvalue these coins and force them into the Canadian circulation, but a simultaneous law that permitted the sale of bills of exchange by the British military at a premium of only three percent if purchased with British silver contributed toward rapid removal of the coins from circulation as they were used for the purchase of bills of exchange.24 Combining Gresham's Law and the currency laws, some predictions can be made about the currency in circulation in Canada over the period 17961830. Pistareens, being "bad money" would tend to drive all other coins out of circulation. Since there was no penalty for clipping silver coins, other lightweight silver coins might also circulate. Full-bodied silver coins would not circulate at a premium, but would be driven out of the country or into individ-

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ual hoards. Gold coins would be unlikely to circulate, and if traded it would be at a premium determined by the degree of undervaluation. Although it is not possible to determine precisely the amount of various legal coins in circulation, there are enough comments by various contemporaries to draw some general conclusions. There is considerable evidence that silver— in particular French crowns and Spanish pistareens—dominated the coinage. An 1816 report on the potential usefulness of a bank to Lower Canada includes this statement from J. Mure, a prominent fur trader and a member of the Executive Council: "A very great proportion of the specie in circulation being in silver is a very great inconvenience."25 At the Decimal Coinage Commission in 1857 Draper discussed the state of the Canadian currency in 1820 when he had first arrived in Upper Canada: We had in circulation . . . the French crown and half crown of the old French coinage, as old as Louis the Fifteenth (if I am not mistaken), worn very smooth, and this was very much more in circulation in Lower than in Upper Canada. Of gold we saw very little.26 The Legislature of Upper Canada nominated a select committee to examine the state of the currency in 1830. The preamble to the report cites a comment in the Quebec Gazette: "[The currency of Lower Canada] now consists principally of French half crowns, and Spanish pistareens. For English silver dollars, halves, and even quarters are eagerly bought up at a premium for the purpose of being exported or to purchase foreign exchange."27 The paper also cites the instance of a Mr. Hall arriving in Montreal with "five thousand pounds all in the shillings commonly called Pistareens." Evidence from various witnesses called by the committee was virtually unanimous. When asked by the committee about the practice of the Bank of Upper Canada in circulating French coins and pistareens, a witness (J. Cawthra, a prosperous Toronto merchant) replied: "The Bank has certainly tendered these coins and in large sums, and we all do so more or less."28 He added that the Lower Canada banks followed the same practice. This evidence that the bad money did circulate is complemented by evidence that good monies were available at a premium. In 1824 a Quebec merchant, Thomas Wilson, reported that the Bank of Montreal would not cash a check for £500 cy. in dollars; it would only give dollars at a one percent premium.29 Similarly, the bank would only pay out gold coins at a premium. A. Simpson, the cashier of the Bank of Montreal's office in Quebec was asked: "Are not and have not Spanish dollars, British, Spanish and American gold coins of legal currency in this province been bought and sold at a premium by the Bank of Montreal?" He replied, "I believe so." This detailed discussion of the Canadian currency situation early in the nineteenth century suggests a possible explanation for chronic complaints

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about the scarcity of specie. In a sense it was the scarcity of "good specie" that was being protested. The multi-coin standard did not collapse to a single-coin standard, but led to a bewildering combination of clipped silver coins, and silver and gold coins at premia, premia that may have been viewed by contemporaries as reflecting the scarcity of specie. Such a process is described in Sanford's Report on the Metallic Currency of the United States submitted to the U.S. Senate in January 1830: "(When coins] circulate by tale . . . the heavier pieces are continually withdrawn from circulation. The substitution of lighter coins for heavier pieces proceeds . .. until at length a scarcity of coins is felt."30 Here it is obvious that a "scarcity of coins" implies a scarcity of heavy or full-weight coins. There is an interesting parallel with the situation in early seventeenth century England where, as in the Canadas, there were frequent comments on the scarcity of money. B.E. Supple argues that even though there was in that case "considerable confusion and laxity in the use of terminology" (that is, some individuals were complaining of poverty and a lack of capital rather than the lack of a medium of exchange), there was indeed a scarcity of good silver coin, although there was also a superfluity of worn and clipped coins.31 He then argues that this situation was caused by the currency legislation of Tudor England. A similar result is found in the case of Canada in the early nineteenth century. Currency legislation drove out all but old, worn French and small Spanish silver coins, leaving a "scarcity" of gold and good silver coin.

The Traditional History of Canadian Currency One of the chief problems of a new country is to secure and retain a supply of currency. Its wants are so much larger than its production, that as a rule all coin is promptly gathered up by importers to meet their overseas accounts.32 Canadian monetary historians have accepted the views of the colonists that there was a scarcity of specie and that it was caused by a chronic external drain. The corollary of these views is that the primary stimulus for the development of a banking system was the need for a medium of exchange. The first comprehensive histories of banking and currency in Canada were those of R.M. Breckenridge and A. Shortt.33 They argued that the withdrawal of Army Bills led to a scarcity of media of exchange. Later writers have agreed. G.M. Craig, in the standard history of Upper Canada, writes that after the War of 1812, Army Bills were withdrawn, and "the province was also being denuded of specie to pay for the many purchases made after the return of peace."34 The view of modern economic historians is that put forth by E.P. Neufeld in his comment that: "Canada's earliest monetary history repeatedly reveals a woeful

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scarcity of medium of exchange for settling transactions in ordinary domestic trade."35 Later, in his broad study, The Financial System of Canada, Neufeld says: [Army Bills] clearly established the benefits of a paper currency which merely required specie, or its rough equivalent in the form of bills of exchange, as a reserve, and which was not subject to disappearance through external drain as was circulating specie coinage. The successful experiment with Army Bills reduced public suspicion toward paper money and eased the way for the establishment of note issuing chartered banks—particularly when the redemption of the Bills once more subjected the economy to all the inconvenience of a short supply of medium of exchange.36 The concept of a "chronic scarcity of specie," although emphasized, is rarely defined. If the word scarce is used in an economist's sense, it is a tautology: a medium of exchange is of necessity scarce. What presumably was meant, however, was that a chronic excess demand for specie existed. It was argued that a permanent excess demand for imports caused specie outflows, which in turn caused the scarcity of specie. This argument needs careful examination. We begin by presenting a simple model of the supply and demand for money in a small open economy on a specie standard. This model, propounded most notably by Hume, incorporates what we will call the "natural distribution hypothesis": in a stationary equilibrium the amount of specie metals distributes itself among nations in such a manner that the price level is the same in all nations, and in each country the demand for specie metals equals its supply.37 Assume that the demand for nominal money balances is described by equation 1:

MD = k(-)PY

(I)

where P is the domestic price level and Y represents aggregate real income; k (the Cambridge "A;") is a function of variables, such as the interest rate, which are assumed constant so that fc(-) equals k. If the real income level is constant, the level of the nominal money stock is determined. If over time aggregate real income rises, then the equilibrium money stock would also rise. This model predicts that there would be no excess demand for specie (money) in a stationary equilibrium or, indeed, in a growing economy with perfect foresight. If, however, the economy was growing or there was imperfect foresight and balance of payments adjustments did not occur instantly, there might be a "permanent" excess demand for money; increases in supply would always lag behind increases in demand. In the Canadian economy it is possible that part of the scarcity of specie was caused by this kind of disequilibrium phenomenon. Such a model predicts that the excess demand for specie would be accompanied by (1) specie

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imports, (2) a price level below the international price level, and (3) if we assume net capital flows were negligible, a balance of trade surplus. Empirical evidence is rather limited: Price and balance of trade data are not available, and data on specie flows are poor. Canadian imports and exports of specie at St. Johns—the major port of entry for goods imported from the United States into Canada—are shown in Table 4 for the years 1815 to 1830. Prom 1812 to 1815 the War of 1812 would have prevented legal (and therefore recorded) specie flows from the United States. It is likely that the United States was the major source of specie to Canada. The major importer was the British army, which frequently obtained specie in New York by selling bills of exchange on the Treasury in London.38 Over the period 1815-1830 this evidence suggests that there were net imports of specie consistent with the model described above. That is, the data show net imports of specie into Canada, and, therefore, are inconsistent with the view that there was a scarcity of money because "all coin was promptly gathered up by importers to meet their overseas accounts." Table 4: Imports and Exports of Specie at St. Johns (in £ cy.)

Year 1815 1816 1817 1818 1819 1820 1821 1822 1823 1824 1825 1826 1827 1828 1829 1830

Imports 349,594 0 53,750 243,000 57,445 16,764 115,314 117,000 72,065 150,744 141,755 96,182 227,963 25,961 150,114 198,499

Exports 0 0 0 367,751 119,975 72,719 15,430 81,541 34,605 26,953 97,194 32,766 14,583 23,476 27,223 31,057

Net Imports 349,594 0 53,750 -124,751 -62,530 -55,955 99,884 35,549 37,460 123,791 44,561 63,416 213,380 5,485 122,891 167,442

Source: Lower Canada, House of Assembly, Journals, various years.

Historians have accepted the "external drain" hypothesis, which is challenged here, in part because it was compatible with the staples thesis, the traditional framework of analysis of Canadian economic historians. The staples thesis argued that the characteristics of economic growth depended on

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the characteristics of various staple, natural-resource-intensive exports.39 The work of H.A. Innis, especially his detailed studies of the fur trade and the fishery, was particularly influential in the development of the thesis and its application to Canada.40 Innis argued that immigrants arriving in a new country had a culturally generated need for imported goods. The maintenance of cultural traits to which they have been accustomed is of primary importance. . . . The methods by which the cultural traits of a civilization may persist with the least depreciation involve an appreciable dependence on the peoples of the homeland. The migrant is not in a position immediately to supply all his needs and to maintain the same standard of living as that to which he has become accustomed. . . . If those needs are to be supplied he will be forced to rely on goods which are obtainable from the mother country.41 Geography, comparative advantage and relative factor prices led to exports of light, unprocessed, natural-resource-intensive products to finance necessary imports. A chronic trade imbalance is clearly compatible with the staples thesis. New countries had an insatiable demand for imports, for which there were no substitutes. In this view, the demand for imports caused any coins that entered the country to be exported immediately to pay for the imported goods; yet all potential increments to the stock of money had to be imported because the colony lacked mints and significant domestic output of specie metal. Recent research has led to a reevaluation of the usefulness of the staples thesis as a theory of economic growth, and there has been a shift of emphasis away from the external demand for the staple toward the characteristics of the domestic economy.42 It is time also for a re-evaluation of the causes (if not the existence) of a scarcity of specie in colonial economies. An external drain of all coins was not the cause of the scarcity of specie.

Implications The British colonists in North America frequently complained about the scarcity of specie, arguing that the unfavourable balance of trade necessitated "the return to the mother country [of such specie] as was received."43 This argument led to appeals for paper money to substitute for the unavailable specie. I have argued that the "unfavourable balance of trade argument" is inconsistent with economic theory (and in Canada, with observed specie flows). Why then did the colonists complain? "There still prevails, even in countries well acquainted with commerce, a strong jealousy with regard to the balance of trade, and a fear that all their gold and silver may be leaving them."44 This was Hume's view of the mercantilistic attitudes he perceived in 1752.

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This paper has analysed the Canadian currency from 1796 to 1830 and has suggested an alternative explanation to either aan external drain11 or "mercantilist paranoia." The currency legislation of the provinces implied that specie circulating in the Canadas would be small silver coins that were often clipped. This poor quality coin and the premia that were observed on better monies led to complaints about the scarcity of good money.

Notes [I] B. Hammond, Banks and Politics in America from the Revolution to the Civil War (Princeton, 1957), 1. The most recent variation of this hypothesis suggests that the absence of coins of small denominations was a particularly significant stimulus to the emergence of paper currency. See J.R. Hanson II, "Small Notes in the American Colonies," Exploration in Economic History (1980) 17:411-20. A very brief survey of Australian monetary history suggests that the "scarcity of specie" is also a part of that literature. Steven speaks of a colony "denuded of coin": M.J.E. Steven, "The Changing Pattern of Commerce" in G.J. Abbott and N.J. Nairn, eds. Economic Growth of Australia, 1788-1821 (Melborne, 1969), 302. See also R.V. Jackson, Australian Economic Development in the Nineteenth Century (Canberra, 1977). [2] This theory has taken its most sophisticated form in the monetary approach to the balance of payments; however, as Prenkel and Johnson note, its roots can be traced to the writings of Gervaise and Hume. See J.A. Prenkel and H.G. Johnson, "The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origins" in The Monetary Approach to the Balance of Payments (Toronto, 1976). [3] See E.P. Neufeld, ed., Money and Banking in Canada (Toronto, 1964; reprint, Toronto, 1967), 1. [4] See G.M. Craig, Upper Canada: the Formative Years (Toronto, 1963) for a general history of Upper Canada from 1791 to 1841, and F. Ouellet, Lower Canada (Toronto, 1980) for the same for Lower Canada. [5] Census of Canada, 1870-71, vol. 4 (Ottawa, 1876). [6] J. Stevenson, "The War of 1812 in connection with the Army Bill Act," Transactions of the Literary and Historical Society of Quebec (1891-92) 21. [7] C. Mclvor, Canadian Monetary Banking and Fiscal Development (Toronto, 1961), 20. [8] See A. Shortt, "The Early History of Canadian Banking," Journal of the Canadian Bankers1 Association, pt. 4: "The First Banks in Lower

Analysis of the Canadian Currency

[9] [10] [11]

[12] [13] [14] [15]

[16] [17]

[18] [19] [20]

99

Canada'1 (July 1897): 341-60; and pt. 5: "The First Banks in Upper Canada" (Oct. 1897): 1-21. Lower Canada, House of Assembly, Journals (1831); and Upper Canada, House of Assembly, Journals (1831). Shortt "The Early History," pt. 3: (Apr. 1897) 246. Cited in J. Stevenson, "The Currency of Canada after the Capitulation" in Transactions of the Literary and Historical Society of Quebec (1877) 12:121. Cited in J. Castel-Hopkins, Canada: An Encyclopedia of the Country (Toronto, 1898), 461. Ibid, 461. Upper Canada, House of Assembly, Journals (17 March 1817), in Report of the Bureau of Archives of Ontario (1913), 378. "The want of such an establishment (a bank) was severely felt before the war, and there is hardly any doubt but that the same inconvenience will very shortly occur, whereas a well regulated bank would obviate all these difficulties by keeping up a circulating medium to meet every public demand," cited in Castel-Hopkins, Encyclopedia, 463. Upper Canada, House of Assembly, Journals (6 April 1821), in Report of the Bureau of Archives of Ontario (1913), 450. F.W. Fetter, "Some Neglected Aspects of Gresham's Law," Quarterly Journal of Economics (1932): 46. Fetter's analysis applies Gresham's Law to a monetary system in which many different coins circulate. In a recent article linking Gresham's Law and the literature on currency substitution, Gresham's Law is applied to a monetary system where the "good" money is coins and the "bad" money is paper. See D.O. Flynn and D. Roper, "Gresham's Law and the Modern Theory of the Demand for Money," Eastern Economic Journal (1982): 8. Fetter, "Gresham's Law," 493. M. Friedman and A. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, 1963), 27. A point made by W.G. Sumner, A History of American Currency (New York, 1874; reprint, New York, 1968), 13.

[21] Note that this problem arises when the receivers of coins cannot immediately distinguish a counterfeit or clipped coin from a good coin. See G. Akerlof, "The Market for Lemons: Quality, Uncertainty and the Market Mechanism," Quarterly Journal of Economics (1970) 84:488-500. [22] L.H. Officer, "Dollar-Sterling Mint Parity and Exchange Rates, 17911834," Journal of Economic History (1983), 43.

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[23] See Upper Canada, Statutes, 7 Geo. IV c 4. [24] A. Shortt, "The History of Canadian Currency Banking and Exchange," Journal of the Canadian Bankers' Association (July 1902) 10:272. "The British coins, which alone were accepted in payment for (Commissariat) bills, bore a corresponding premium. The soldiers, who were paid in half crowns at the rate of 2s. 9d. currency, immediately disposed of them at the nearest shop for 3s. in current money or goods. The merchants in turn immediately conveyed the coins to Government chest, whence they had just emerged, for the purchase of Government exchange." [25] Lower Canada, House of Assembly, Journals (1816) 25:App. G. [26] Great Britain, Parliament, "Appendix to the Final Report of the Decimal Coinage Commissioner, 1859," in Monetary Policy: Decimal Coinage, vol. 2 (Shannon, 1970), 45. Louis XV reigned from 1715 to 1774. [27] Upper Canada, House of Assembly, "Report of the Select Committee on the State of Currency," Journals (1830):A2. [28] Ibid, 29. [29] Lower Canada, House of Assembly, Journals (1823-24) 33:288. [30] Cited in Upper Canada, "Report of the Select Committee on the Currency," 37. [31] B.E. Supple, "Currency and Commerce in the Early Seventeenth Century" Economic History Review (1957) 10:244. [32] H.A. Innis and A.R.M. Lower, Select Documents in Canadian Economic History (Toronto, 1933), 388. [33] R.M. Breckenridge, The Canadian Banking System 1817-1890 (New York, 1895); and Shortt, "Canadian Banking." [34] Craig, Upper Canada, 161. [35] Neufeld, Money and Bankingt 1. [36] E.P. Neufeld, The Financial System of Canada (Toronto, 1972), 39. [37] D. Hume, "Of the Balance of Trade," in E. Rotwein, ed., David Hume: Writings on Economics (London, 1955). [38] British Military Records, Records of the P.A.C. R.G.8 series C., vol. 321, roll 97, 81.

Commissariat (1800)

[39] See, for example, W.T. Easterbrook and H.G.J. Aitken, Canadian Economic History (Toronto, 1956); and M.H. Watkins, "A Staple Theory of Economic Growth," Canadian Journal of Economics and Political Science (1963) 29:141-58.

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101

[40] H.A. Innis, The Cod Fisheries: The History of an International Economy (Toronto, 1954), and The Fur Trade in Canada: An Introduction to Canadian Economic History (Toronto, 1956). [41] Innis, The Far Trade, 383. [42] See W.L. Man and D.G. Paterson, Canada: An Economic History (Toronto, 1980); and in the United States, D. Lindstrom, Economic Development in the Philadelphia Region (New York, 1978). [43] H.E. Miller, Banking Theories in the United States Before 1860 (Cambridge, Mass., 1927; reprint, Clifton, New Jersey, 1972) 48. [44] Hume, "The Balance of Trade," 61.

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The Efficiency of the French-Canadian Farmer in the Nineteenth Century F. LEWIS AND M. MclNNis It is widely accepted that in the first half of the nineteenth century the habitant farmer of French Canada was inefficient in comparison with Canadian farmers of British origin. The French-Canadian has almost universally been described as backward, unenterprising, untutored, and resistant to improved techniques of husbandry, content to cultivate the land in what Lord Durham characterized as ". . . . the worst sort of small farming."1 The best-known paper in English on the subject is essentially a catalogue of the backward and inefficient farming practice to be found among the French-Canadian farmers, but this characterization is not just a reflection of Anglo-Saxon bias; it is shared by French-Canadian historians as well.2 Many reasons have been offered for the backward state of agriculture in Lower Canada: the soil was exhausted from continuous cropping of wheat and a failure to use manure, the land was over populated and the farms excessively subdivided, implements were crude and livestock badly cared for. Furthermore, it is the ethnic or cultural dimension that is repeatedly stressed, with French-Canadian farmers contrasted unfavourably with their English-speaking neighbours.3 If only, it was frequently suggested, the habitant farmers had learned from the patently better practice of the English! Indeed, it has often been remarked that in districts where the French and English farmed in close proximity, such as the region south of Montreal, the French inefficiency was most notable. Their opposition to improved farming practice has been interpreted as part of a resistance to British culture generally. Dedicated as they (the habitants) were to the preservation of their laws, their language, and their religion, they resisted any change, however small, in their mode of life. It was this aversion to innovation which rendered the distress of the seigneuries so acute, and made it so difficult to ameliorate.4 The weakness of the agricultural economy of Lower Canada thus is seen to have cultural roots. The problem lay in the self-protective, inward-looking nature of the French-Canadian culture, in the esprit passion of the habitant on which Seguin places so much stress.5 Between the late 1830s when wheat crops were devastated by the wheat midge and the mid-1840s when the potato crops were widely hit by rot, agriculture was in a particularly distressed state. Indeed, the "agricultural crisis" Source: F. Lewis and M. Mclnnis, "The Efficiency of the French-Canadian Farmer in the Nineteenth Century," Journal of Economic History (1980) 40:497-514. Reprinted with permission.

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of French Canada has emerged as a predominant theme of the history of the period. There has been much argument over the timing and the immediate reasons for the agricultural crisis of Lower Canada, yet there is wide agreement that behind it all lay a significant cultural difference between Erench and English. Was the FVench-Canadian farmer really so deficient? There are good reasons for being sceptical. In recent years we have become wary of the sweeping characterization of traditional agriculture as irrational and inefficient. The words "peasant" and "peasant mentality" no longer hold the connotations they did in past writing. No doubt the French-Canadian farmer of the early nineteenth century was backward and inefficient by later standards, but that was true of North American farming generally. Much that has been claimed of French-Canadian agriculture has been said elsewhere about farming in other areas of eastern North America. Careless farming, failure to keep livestock or to use animal manure if it was available, light tillage, inadequate weed control, and erosion of the topsoil so reduced yields that ultimately wheat ceased to be the basic crop.6 That is not R.L. Jones or F. Ouellet describing FVench-Canadian farmers but P. Gates on the agriculture of New York State. It is not self-evident why phenomena common to much of eastern North America should be elevated to the dimensions of a major crisis imbued with an ethnic cast in the particular case of Lower Canada. The prevailing judgment on French-Canadian agriculture has been based almost entirely on descriptions by contemporary writers—travellers, agricultural improvers and respondents to surveys by committees of the Legislative Assembly. A few census figures have been introduced into the argument, but little systematic use has been made of the considerable amount of quantitative information that exists.7 The sources that have been relied on are open to interpretive dispute in a number of ways. There is the general bias of writers with a concern for agricultural improvement to be critical of the farming practices they observe. Typical performance almost certainly fell short of best practice and, although it was more likely that the exemplary farmers were English-speaking immigrants, that does not imply that the general run of English farmers was any better than the general run of FYench Canadians.8 Furthermore, the historians1 use of contemporary descriptions has been selective. Writers critical of French-Canadian agriculture regularly make reference to quite well-known accounts that present a more favourable picture.9 Finally, there is the problem that early descriptions sometimes get distorted when they are presented by subsequent commentators.10 Because of these shortcomings in the current literature, we believe that the state of French-Canadian agriculture in the early part of the nineteenth century warrants reexamination.

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A substantial amount of unexploited data exists to provide the basis for a quantitative reassessment of the agriculture of Lower Canada. There are fairly good records of commodities traded and transported; there are extensive seigneurial archives, notarial records, wills, government surveys; and there are quite comprehensive censuses for 1831 and 1852. In what follows we report just one step in the reexamination of agriculture in Lower Canada. We address the published census data for 1852 with the limited but central question: does the evidence support the contention that French-Canadian farmers were less efficient than English-Canadian farmers in Lower Canada?11 One objection that might be raised is that 1852 is a relatively late date for which to test the proposition that the French in Lower Canada were less efficient farmers than the English. The consensus of historical writing would place the period of greatest distress before the middle of the nineteenth century. On the other hand, there has been a considerable debate over whether the "agricultural crisis" in Lower Canada predates 1820. The period of most acute stress was in the 1830s when the wheat crop was completely destroyed, though many writers clearly apply their descriptions to the 1840s as well. The census of 1851-1852 hardly came so long after this period that any established productivity differential between French and British farmers could have closed much.12 If French-Canadian farmers were so much less efficient than the British, so set in their ways, and so slow to adopt improved farming practices as has been claimed, it could hardly fail to show up in 1852.

Selection of Districts to be Studied Our approach is to use aggregate census data at the parish and township level and to compare inputs, outputs, and productivity for ninety districts that were almost wholly French or English.13 Wholly English districts were much less numerous than the French and were concentrated in a few parts of the province. The forty-two English districts we have selected comprise almost the whole set of districts in which no more than 10 percent of the population was French. We then selected a comparable number of wholly French districts that were in closest proximity to the English districts chosen.14 Extensive areas of predominantly French settlement in Lower Canada are left out. There is no good reason to suspect that the excluded districts were on average more or less efficient than those included in the study. Moreover, it has often been emphasized in the literature that the deficiency of the French was most evident in the region to the south of Montreal where French and English were farming in closest proximity. The selected parishes and townships are clustered in four regions of Lower Canada. Region I lies to the north of Montreal and west along the Ottawa River. This area was for the most part a poor agricultural region with an important sideline in the forest industry, but it had good transportation to

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market via the river. Region II encompasses the area directly south of Montreal where British emigrants had settled in parts of the old seigneuries of Beauharnois and Chateauguay and in the adjacent townships. This was better farming country with good access to the urban market of Montreal. The third and fourth regions were further east. They include the old core of the Eastern Townships, populated largely by early migrants from the United States and their descendants. This was upland country, distant from markets either in the St. Lawrence valley or in New England. There is no genuinely close counterpart of wholly FVench localities since in 1852 the French had only recently begun to move into the Eastern Townships. We have matched to the English townships two areas of French settlement, one to the west and one the northeast. The parishes of the Richelieu valley, between Montreal and the Townships, encompass an area of good land that had once been regarded and the "breadbasket" of Lower Canada but had come to be regarded as the centre of the agricultural distress in the province.15 The fourth region pairs the more lightly and recently settled area of the Townships with districts of recent French intrusion from the northeast.16 This is not intended to be a random sample of districts. Rather it is a comparison of the English districts of Lower Canada with a similar number of the most comparable, homogeneously FVench districts that can be identified. The essential issue we pose is whether the quantitative evidence on agricultural production that can be derived from the census of 1851-1852 supports the contention that farming in French districts was less efficient than in English districts. The comparison is made over all of the selected districts and between French and English districts within each of the four regions. The focus is strictly on efficiency as a measure of farming practice. We do not deal directly with the question of whether French farmers may have been poorer than the English. It is quite possible that they were, if they had fewer resources to work with. In previous writing on this topic no clear distinction has been made between poor farming and inefficient farming. The evidence cited, though, has so often concerned examples of bad farming practice that it seems fair to presume that in the eyes of most writers on the topic the indictment against the French-Canadian was one of inefficient farming. To examine that indictment we try to confront the question directly. By estimating agricultural net output and factor inputs on a district basis we can ask whether total factor productivity is greater in English than in French districts. This is done by pursuing a quite well-developed line of analysis. Given the labour, land, and capital resources with which they had to work, did the FVench-Canadian farmers of Lower Canada get less output than their English-speaking neighbours?

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The Index of Relative Efficiency Our estimate of relative efficiency is based on a production function in which output (Q) is determined by a multiplicative combination of the inputs labour (L), capital (K) and land (T) in Cobb-Douglas form, (1)

where A is the total factor productivity.17 If farmers in French and English districts are assumed to have agricultural production functions of the same form and with the same output elasticities, the efficiency of French relative to English agriculture is given by (2)

This is essentially the same formulation used by R.W. Fogel and S.L. Engerman in their comparison of the relative efficiency of northern and southern agriculture in the United States.18 The output estimate (Q) is an aggregation of physical quantities weighted by a set of prices that we assume to be equal across French and English farming districts. The two ethnic groups shared the same general territory, farmed under very similar soil and climatic conditions, and enjoyed roughly equal access to markets.19 The product mix differed between French and English, but both were quite able to raise the same products.20 To test for a productivity differential, then, the main task of the research behind this paper is to establish sufficiently reliable estimates of outputs and inputs at the district level. The general approach to this task is reviewed briefly in the following section. Details are specified in the Appendix, available from the authors on request.

The Estimation of Farm Output and Inputs Agricultural production, Q, in each district is measured as the value of farm output, net of intermediate products. Our measure of output is not fully comprehensive, mainly because of a lack of requisite information. It encompasses by far the greater part of farm production, however, and there is no reason to believe that the excluded components of output favour either French or English.21 In general, in developing the estimate of agricultural output, we try to avoid assumptions that would have the effect of raising net output in French districts more than in English districts. The census of 1852 provided us with reasonably good data on crop production. The chief problems that have to be dealt with in estimating agricultural output are (1) to deal adequately with interdistrict trade in intermediate products, (2) to net out appropriately crops

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fed to livestock, and (3) to capture the effects of differences between regions in farm practices. It is convenient to group agricultural production into three categories: animal products, field crops including crops grown for animal feed, and miscellaneous products such as hops, maple sugar, and tobacco. The last category made only a minor contribution to agricultural output in nineteenth-century Canada. A widely used procedure would be to estimate the values of animal products and the miscellaneous commodities and to add only that part of field crop production that is used for human consumption or is sold out of the district.22 There are two major difficulties with this approach. One is that we lack information on shipments of feed crops between districts. The second is that there would be differences between districts in the fractions of crop output used for animal feed and in the amounts of output obtained per animal. Another, even simpler, approach, given that our objective is to compare relative efficiencies and not to estimate the absolute levels of production, would be to look just at the output of field crops, regarding animal products as merely converted feed crops. The problem here is partly that livestock were grazed as well as fed produced crops and the relative importance of grazing may have varied from district to district; partly that value added varied by type of animal;23 and partly that some field crops, notably hay and oats, were intermediate inputs in the production of field crops because they were used as feed for draft animals. This method is open to too many biases to warrant its use for our purposes. We develop yet another estimating procedure. It is explained in greater detail, and the sources of data are specified in the Appendix to this paper, which is available on request. The following paragraphs merely outline our approach. For each district the quantities produced of each field crop and miscellaneous product were taken directly from the census report. These were then valued at estimated farm prices, based on information on market prices, primarily at Montreal.24 To that we add an estimate of livestock and animal products, again valued at estimated farm prices. Direct information on the output of animal products is lacking, however, so we have had to infer it by combining census data on the stocks of animals with assumptions about output per animal that are developed from a wide range of literature on farming practice. The same production coefficients are used across all districts.25 We then estimate the value of feed required to obtain the computed output of animal products. This was done by establishing a set of feed coefficients by type of animal, based on what we were able to learn from descriptions of feed practices;26 reconciling them with estimates of the quantities of feed actually available in Lower Canada in 1851; and valuing each feed crop at the farm prices used in the earlier calculation of the value of field crops. The resulting per animal feed bill, in dollar terms, was applied to the stock of each type of

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animal by district and the total feed requirement of the district deducted from the total value of agricultural output. The merit of this procedure is that it allows us to circumvent the difficulty posed by trade between districts in intermediate products, a trade that was probably quite substantial. The census data reveal districts that manifestly raised more feed crops than they had animals to feed. Oats was the leading cash crop in many areas of Lower Canada at this time. Other districts kept many more animals than could reasonably be fed with the amount of crops they were growing. The specialization to be observed among districts had indications of a systematic ethnic pattern to it. Broadly speaking, the French districts allocated more of their resources to growing field crops, especially wheat and peas, and they tended to raise more pigs. The English districts produced relatively more beef. For districts that imported feed, the procedure that we follow generates a feed bill in excess of the value of feed crops produced. Similarly, our method captures sales of feed by other districts that produce feed crops in excess of their calculated feed bills. A second advantage of the procedure followed here is that it permits at least a partial incorporation of variations between districts in the quality of farm practice with respect to the output of animal products. While at first glance it might appear that, to the contrary, we have assumed away any differentials between French and English districts in livestock management by using the same output coefficients for all districts, we pick them up in an inferential way by also using fixed per animal feed coefficients across all districts. If the English, for example, got more beef per steer or more milk per cow than the French, they did so by using more feed. Beef animals could be raised to greater weights or brought to a given slaughter weight at a younger age, but this could be done through more intensive feeding. More output could be obtained from milk cows by maintaining them in milk for a longer period of the year. That too requires a greater input of feed. Our procedure allots only an average amount of feed per animal in all districts. In districts where more output was being obtained through more-intensive feeding, larger amounts of feed would have been produced. Our procedure fails to allocate that additional feed to the maintenance of livestock but values it as output. The offset is not complete. To the extent that there is a value added in converting crops into animal products, a surplus of feed treated as though it were sold on the market is worth somewhat less than the value of the animal products it would produce.27 Our procedure nevertheless captures a large part of the main source of differential efficiency.28 The value of the net output of agriculture in each district, computed as the sum of the values of each farm product less the value of crops fed to animals, is then compared with the estimated factor inputs. Of these, only the input of labour gave rise to complicated estimation problems. The land input is the acreage of land reported by the census to be "under cultivation."29 The

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capital input consists primarily of livestock, estimated by adding together the number of each type of animal reported in the census, weighted by values of the animals.30 That measure is then augmented to take into account the small amount of machinery and equipment in use at the time.31 To estimate labour input we had to turn to the manuscript enumeration sheets for the census. Occupations had been tabulated on a county, not parish or township level, and there were relatively wide variations across districts in the ratios of labourers to farmers. Although the whole of Lower Canada outside Quebec and Montreal was preponderantly agricultural, we had no effective way of identifying concentrations of nonagricultural workers from the published census records. For about two-thirds of the districts we were able to tabulate occupations from the manuscript census. For the remaining third, an alternative approach had to be followed because the census manuscripts were missing. No distinction was made in the census manuscripts between farm and nonfarm labourers. In most cases the sons of farmers, residing in the same household and reporting their occupations as journalier could be regarded as farm labourers. In some districts, however, in wholly agricultural communities, there were large numbers of labourers living next to clusters of persons with nonagricultural occupations in what presumably were villages. We encountered a similar problem with the term "servant," which was sometimes applied to adult males living in farm households. To estimate the number of agricultural labourers and servants, in our retabulation of the manuscript census data we grouped males over fourteen years of age into five occupational categories: farmers, labourers, servants, persons of private means, and "others." The proportion of labourers and servants attributed to agriculture in each district was taken to be the same as the ratio of farmers to the number of farmers plus "others." A fraction of the male population aged ten to fourteen years was then added to the sum of farmers and estimated agricultural labourers.32 For eleven districts the manuscript censuses were missing but we had manuscript data for many of the other parishes or townships in the same county. For these eleven districts we assumed that the proportion of the male population ten to seventy years of age engaged in agriculture was the same as for those districts in the county for which we could tabulate occupations from the manuscript census.33 Our measure of farm output includes only the products of cultivated land, yet farm labour was being used partly to clear unimproved land and to produce firewood, timber and ashes, none of which we have incorporated into output.34 To make our indices of inputs and output consistent we reduced the labour input to take into account time spent working on unimproved land.35 The adjustment is based on a regression of the output-labour ratio on the ratio of unimproved to improved land, using data for all districts: (3)

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where L* is total labour input applied to both improved and unimproved land and rn is the ratio of unimproved to improved land.36 If the significant coefficient on ru (see Table 1) is attributed to labour that was used on unimproved land,37 our estimate of labour applied to improved land only can be written:38 (4)

Table 1: Adjustment Coefficient Estimates Coefficient

Estimated value

t-statistics

a b

12L8 0.2616 fl2 = 0.414

17162 4.5946

Note: The non-linear estimation was performed using the TSP routine, ITERAT.

The Estimation of Relative Efficiency With the estimates of inputs and outputs by district we can now return to the index of relative efficiency introduced above as equation (2). On the assumption that factor shares are the same across all districts and that the production function is of a Cobb-Douglas form, this can be rewritten for purposes of estimation as: (5)

where AF and AE are total factor productivity in French and English districts respectively; a, /?, 7 equal output elasticities of labour, capital, and land; D equal zero for French districts and one for English districts; and it is a randomly distributed error term. Regression estimates of the coefficients of equation (5) were made for the entire sample of ninety parishes and townships. Two restrictions were imposed on the coefficients: the factor shares were restricted to add to unity, and the ratio of capital's factor share to land's factor share was set equal to the 1861 census ratio of the value of livestock and implements to the value of other farm property.39 The result appears in equation (6): InQ =

2.295 + 0.018D + 0.355 In L + 0.159 In K + 0.486 InT (9.488) (0.413) (5.441) (9.895) (9.895)

(6)

112

F. Lewis and M. Mclnnis Table 2: Relative Productivity (French/English) by Region

Region0 1. All districts0 2. Region 1 3. Region II 4. Region III 5. Region IV 6. All districts0 (labour input

Q/L Q/K 0.778 0.935 1.014 0.965 0.905 1.075 0.859 0.992 0.740 1.084 0.869 0.935 unadjusted)''

Q/T 1.044 1.011 1.140 0.975 1.256 1.044

Case 1 0.924 1.004 1.041 0.934 0.017 0.960

A" Case 2 0.878 1.007 0.999 0.911 0.924 0.935

Case 3 0.843 1.009 0.996 0.893 0.858 0.911

Source: See text. a Region I: Ottawa valley, north and west of Montreal (includes districts in the counties of Ottawa, Terrebonne, and Two Mountains); Region II: Southwestern Quebec directly south of Montreal (Beauharnois, Chambly, and Huntingdon); Region III: Richelieu valley and the more nearby Eastern Townships (Missisquoi, Richelieu, Rouville, and Shefford); Region IV: The Bois Franc and the northeastern section of the Eastern Townships (Drummond, Megantic, Sherbrooke). 6 Case 1: a = 0.355, 0 = 0.159, 7 = 0.486; Case 2: a = 0.550, 0 = 0.111, 7 = 0.399; Case 3: a = 0.700, 0 = 0.074, 7 = 0.226. 0 Contains 11 districts included in none of the prescribed regions (see Table 3). d No adjustment made to labour to take account of work done on unimproved land to produce output not included in Q.

where t-statistics are given in parentheses, R2 = 0.963, and F(2,85) = 6.342. Although the estimated factor share of labour may be on the low side, the coefficients of the production function are all within the range of estimates made in other agricultural studies and are statistically significant at the 0.5 percent level.40 The coefficient of D implies that total factor productivity in English districts as a whole was only 1.8 percent greater than in French districts. Moreover, that coefficient is not significantly greater than zero.41 Table 2 presents the results of extending our investigation in two directions. One concerns the possibility that our finding of no significant productivity differential between French and English might result from bias in the statistical estimation of factor shares in equation (6). The FVench districts were relatively more labour-intensive than the English. Hence, if our estimate of labour's share were downwardly biased, that would be favourable to the French. The results reported in Table 2 are based on alternative assumed sets of factor shares in combination with our estimates of inputs and outputs. Additionally, we compare FVench/English productivity within each of the four broad regions as well as for all districts together.

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For the whole sample, setting factor shares at the levels estimated in equation (6), we find (Case 1, line 1) that French farmers were 7.6 percent less efficient than English farmers.42 At higher levels of labour's share the productivity level in favour of the English is increased.43 A possibly more plausible labour share of 0.55 (Case 2) results in a productivity differential of 12.2 percent. It would probably be unreasonable to expect labour's share to exceed 0.7, in which case the productivity differential would be as great at 15.7 percent (Case 3). Case 3 would represent just about the maximum possible difference between French and English productivity that the evidence would support; more likely the difference was something less than that. It is not clear what significance one should attribute to a measured productivity differential of from 7.6 percent to 15.7 percent. Possibly it might have been discernible to a casual observer, but we doubt that it supports the strong contrast between French and English farming practice so widely asserted in the literature. Table 3: Relative Efficiency of Selected Districts Area 1. Stanstead/all other

Q/K

Q/T

Case 1

Case 2

Case3

counties

1.609 1.210 1.013 1.228 1.332 1.419

2. Nicolet and Yamaska/ all other counties

0.747

0.830

1.137

0.932

0.872

0.828

3. French/English (excluding districts in the above counties)

0.862

0.989

1.050

0.970

0.936

0.910

0.993 0.989

1.050

1.020

1.014

1.005

4. French/English (excluding above), no labour adjustment6 Source: See text. a 6

Q/L

See Table 2, fn b, for the factor shares used in each of the three cases. No adjustment made to labour to take account of work done on unimproved land to produce output not included in Q.

Scepticism of the traditional view is reinforced by the results of the comparison of French/English productivity differentials within each of the four broad regions. As can be seen in Table 2, differentials within regions are in all cases smaller than those for the whole sample of districts.44 There are two main reasons for this. First, a larger proportion of the English districts were located in areas of Lower Canada where agricultural productivity, French or English, was relatively high. Within regions, differences in soil quality and in access to

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market should be smaller, and observed productivity differentials should reflect more directly any real differences in farming practice. Yet within regions the differentials we observe between French and English are even narrower than those for the whole sample. A second reason for the narrowed differentials observed within regions is that a few districts included in the overall result have been left out of the intraregional comparisons. These are districts that by almost any criterion fit least plausibly into the defined regions. They also represent the extremes of high and low productivity found within our selected districts.45 With the eleven districts of these three outlying areas excluded, the productivity of differentials between Erench and English agriculture are reduced by about half at all levels of assumed factor shares. This is shown in Table 3, which also highlights the extent to which the one English county of Stanstead stands out from all the rest of Lower Canada, French or English (line 1). When the focus is narrowed to differentials between French and English within presumably more homogeneous regions, it would seem sensible to set aside districts that are manifestly different from the rest of the region. It should be emphasized, though, that our main conclusion is drawn from the evidence for all ninety districts (line 1 of Table 2). It is interesting to consider our results further in the light of the frequently expressed view that the French-Canadian districts suffered from overpopulation. Our finding that, in three of the four regions, land/labour ratios were significantly lower for French than for English farming lends support to that view. There is no appreciable difference between FVench and English land/labour ratios in Region I; elsewhere though, the difference varied from a low of 11.9 percent in Region III to as much as 41.1 percent in Region IV. For all districts together the land/labour ratio was 25.5 percent lower in FVench than in English farming. The indictment of FVench-Canadian farming was based on their supposedly poor treatment of land—their rude tillage practices. The quantitative evidence we present here, however, indicates that for all districts together, and within three of the four regions, the FVench got higher output per unit of land input. The French were evidently able to narrow the productivity differential between themselves and the English to a small, possibly insignificant amount, by attaining higher outputs per unit of land as to offset their generally lower output per worker. We began by asking whether quantitative evidence from the 1852 census of Lower Canada, which previously had not been used in a systematic way, supported the widely held contention that FVench-Canadian farmers were notably less efficient than English-speaking farmers of Lower Canada. Although the results reported here are far from the final word on the issue, they cast considerable doubt on the existence of any sizeable differential in relative efficiency of FVench and English.46 We cannot claim with absolute certainty that we have made a strictly upper bound estimate of the productivity differential in favour of the English, but we have been at pains always to follow procedures

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and to select assumptions that would enhance English and diminish French productivity. Changing the possibly more debatable features of our procedure would strengthen our conclusion by further diminishing the estimated productivity differential. For example, it might be argued that we should not have adjusted labour input to take account of work on unimproved land.47 It is generally the case that farms in the English districts had a larger proportion of unimproved land than those in the French districts. If the index of relative efficiency is estimated without adjustment of the labour input (Table 2, line 6), the differential in favour of the English is substantially reduced. If we reestimate and make the comparison excluding the eleven problematic districts of Stanstead, Nicolet, and Yamaska (Table 3, line 4), the differential disappears entirely. Our adjustment to labour input is based on an assumption that, in districts with a larger proportion of land still unimproved, farmers would have allocated relatively more of their labour to work on that unimproved land. We think that assumption is valid and, therefore, that the appropriate estimates are those made with labour input adjusted. Nevertheless, a retreat from that stand would strengthen, not reverse, our findings. This paper represents only one step in the reexamination of the "agricultural crisis" of Lower Canada. The initial results cast a rather different light on French-Canadian farming. Although we are able to measure a difference in productivity between French and English farming districts, that difference is much less than a long tradition of historical writing has implied. We are not suggesting that French-Canadian farming practice was much better than it has previously been made out to be, only that the English in Lower Canada really were not better farmers than were the French. If Lower Canada did experience an "agricultural crisis" in the first half of the nineteenth century, it now looks much less plausible to seek the cause in the peculiarities of the French-Canadian culture.

Notes [1] Lord Durham, Report on the Affairs of British North America, Carleton Library abridged ed. (Toronto, 1963), 27. [2] R.L. Jones, "French-Canadian Agriculture in the St. Lawrence Valley, 1815-1850," Agricultural History (1942) 16:137-48. The most notable French-Canadian contributions are F. Ouellet, Histoire economique et sociale du Quebec (1966), and M. Seguin, La "Nation Canadienne" et {'agriculture, 1760-1850 (Trois-Rivieres, 1970). The book by Seguin is a recently published doctoral dissertation written in 1947. The author was very influential in the development of the "national" school of FrenchCanadian history that traces many of the ills of modern-day Quebec to the

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F. Lewis and M. Mclnnis consequences of the conquest of New FVance by Britain. The "inefficient" characterization of the FYench-Canadian farmer continues to prevail. Witness F. Ouellet, Le Bas- Canada 1791-1840: Changements structuraux et Crise (Ottawa, 1976) and J. Isbister, "Agriculture and Growth in Canada Since 1850," Economic Development and Cultural Change (1977) 25:67397. A lone note of dissent has been sounded by G. Paquet and J.P. Wallot in "Crise Agricole et Tensions Socio-Ethnique Dans le Bas-Canada, 18021812," Revue d'ffistoire de I'Amerique Frangaise (1972) 26:185-237. Their main concern is to contest the argument of Ouellet that there was agricultural crisis in Lower Canada as early as the first decade of the nineteenth century; they reject out of hand the view that the French-Canadian farmers pursued an inefficient, irrational husbandry. Paquet and Wallot, however, neither contest the arguments put forward by other writers nor present any counter evidence.

[3] Lower Canada had a sizeable minority of English-speaking settlers. Few of these actually were English but were Irish, Scottish, and Americans from New England. For convenience we refer to them in this paper as English. [4] Lord Durham quoted in R.L. Jones, "French-Canadian Agriculture," 148. [5] Ouellet in many ways has been a severe critic of Seguin, yet his overall characterization of French-Canadian agriculture is very similar. In his first of several books on the issue he wrote "En somme, depuis 1785, ils existent dans le Quebec deux types d'agriculture. L'une, traditionelle et canadienne-frangaise, occupait le masse; Pautre, progressive et britannique, rallait les Britanniques et une elite canadienne-frangaise," Histoire Economique, 461 [6] P. Gates, The Farmer's Age: Agriculture, 1815-1860 (New York, 1963), 35. [7] In citing census figures, previous writers have overlooked problems with the data that cast French farmers in a disadvantageous light. Comparisons of crop yields are made between English and French regions without recognizing that for the French regions the figures actually are for minots per arpent, not bushels per acre. Since 1 minot equals 1.107 bushels and 1 arpent equals 0.845 of an acre, 1 minot per arpent is more than 30 percent greater than 1 bushel per acre. Also, comparisons are made of average farm size without adjusting for the inclusion in many French districts of a large number of small (that is, no more than one arpent) garden plots that were not really farms. [8] The Scottish agriculturalist J.F.W. Johnston is often cited for his comparisons of French- and English-Canadian husbandry in Lower Canada. Yet

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Johnston makes clear that his impressions of Lower Canada were based on a most cursory look and he was repeating what was told to him by others. The comparison he actually makes is between common practice and the accomplishments of three identified British immigrant farmers in the vicinity of Montreal. See his Notes on North America: Agricultural, Economical and Social (Edinburgh, 1851). [9] Jones, along with most writers, quotes P. de Sales Laterriere to the effect that the habitant farmers are "far from adventurous, they cling with pertinacity to the little piece of land which in the division of the family property, has fallen to their share." de Sales Laterriere, A Political and Historical Account of Lower Canada (London, 1830), 120. Jones does not share with his readers, however, statements from the same source to the effect that, in 1830, the agriculture of Lower Canada produced "a good level of subsistence, equally distributed . . . . Only in the United States does one find any people better off. . . " (119), and that "The comforts of the people, if compared with any other nation, are wonderfully great" (127). Indeed, de Sales Laterriere insightfully explains how Canadian farming may appear "slovenly and unskillful to the farmer of England but is nevertheless rational" (123). Jones also neglects R. Russell, who is well known to American readers for his severe criticism of the way livestock were managed in the American South, yet does not comment unfavourably on the animal husbandry of the French-Canadians and is otherwise complimentary about their farming. See R. Russell, North America, Its Agriculture and Climate (Edinburgh, 1857). [10] Many examples could be cited. One rather colourful one may be sufficiently indicative of the general problem. It is widely asserted that the French-Canadian farmers were so backward that they did not know enough to spread the manure on the fields but instead hauled it onto the ice of the river to be washed away in the spring (Jones, "French-Canadian Agriculture," 141). The story goes back to the anonymous eighteenthcentury author of American Husbandry, H.J. Carman, ed. (Port Washington, 1964), 26. What was actually said was that, unlike the practice in Europe, in the towns of Quebec and Montreal the nightsoil was not carted into the countryside to be used as fertilizer but was disposed of in the river. The story was repeated often, notably in 1863 by H.Y. Yind, Eighty Years Progress of British North America (Toronto, 1863), 33, so Jones prefaced his description with "In fact, as late as 1860, . . . " as though Hind were describing current practice. [11] There are many aspects of the agricultural situation in Lower Canada that are in need of reexamination. We proceed in small steps, however, and wish to emphasize the limited focus of the present study.

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[12] Other prominent contributors to the literature have thought it appropriate to highlight the French-English comparison for this date. See especially J. Hamelin and Y. Roby, Histoire Economique de Quebec, 1851-1896 (Montreal, 1971), 8. [13] The parishes and townships of Lower Canada were quite detailed localities, the smallest units for which census data were tabulated. The distinction between parish and township was neither cultural nor linguistic—there were French settlers in the townships and we include a few parishes of English farmers—but related to the survey and the form of land tenure. The parishes were subdivisions of the old seigneurial areas; the townships were surveyed under British rule. For brevity we use district to mean either parish or township. [14] An alternative approach would be to use the abundant manuscript census data that are available to compare individual French and English farms within the same locality. Undoubtedly this could be done but it would be difficult for a number of reasons. First, there were in fact very few districts that contained a substantial mixture of both French and English farmers. Second, there is the sticky problem of how to handle interfarm exchanges of feed crops. Most seriously, though, there is the difficulty of finding a basis on which to allocate hired labour to individual farms. [15] Comparability undoubtedly is weakest within Region III. The districts of Region III are included in the study primarily because they constitute the main area of English and French farming in Lower Canada. This weakens the comparisons made later of French and English districts within Region III, but it gives substance to the overall comparison of French and English farms. [16] Although this region looks extensive on the map, it actually was thinly settled and contained only a small number of farms. [17] The assumptions of elasticities of substitution equal to one and equal factor shares are restrictive but do not seriously impinge on the results. The reason is that we derive estimates using a wide range of parameter values (labour's share, for example, is varied over a range from 0.335 to 0.700; see Table 2). That should accommodate possible differences by ethnicity in factor shares that might arise from different factor input proportions combined with non-unitary elasticities of substitution. [18] R.W. Fogel and S.L. Engerman, "The Relative Efficiency of Slavery: A Comparison of Northern and Southern Agriculture in 1860," Explorations in Economic History (1970) 8:353-67; R.W. Fogel and S.L. Engerman, "Explaining the Relative Efficiency of Slavery Agriculture in the Antebellum South," American Economic Review (1977) 67:275-96.

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[19] It is said that in the hillier parts of the English-settled Eastern Townships wheat could not reliably be grown. At the time the same was true, but for a different reason (the wheat midge), in French districts. [20] We can perceive some differences in product mix by ethnicity. The English produced more beef and perhaps more dairy products; the French more wheat and pork. [21] Neither poultry nor egg production was reported in the census and there is no plausible basis for estimating this output. Traditionally, however, they were the responsibility of the farm wife and we have not included her labour in our measure of labour input. Forest products (timber, firewood, shingles, staves, and ashes) are also excluded but, again, we make some allowance for this omission by adjusting labour input, as we discuss in a later section. A number of minor farm products such as honey, wax, tallow, and domestically produced textiles are also omitted. [22] This is the methodology used in well-known historical estimates of net agricultural production for the United States. See R.E. Gallman, "Commodity Output, 1839-1899," in Conference of Research in Income and Wealth, Trends in the American Economy in the Nineteenth Century, Studies in Income and Wealth, vol. 24 (Princeton, 1960), 13-71; F. Strauss and L.H. Bean, Gross Farm Income and Indices of Farm Production and Prices in the United States, 1869-1937, technical bulletin no. 703, U.S. Department of Agriculture (Washington, D. C., 1940). [23] For example, converting feed into dairy products required more labour than converting feed into beef. [24] Suitable compilations of Montreal prices are not readily available; we obtained our data mainly from newspaper reports of prices in the Montreal wholesale market. [25] This might give the appearance of assuming away the very productivity differentials we seek to examine. As explained below, however, we compensate for this in the way we calculate the deduction for feed. [26] After consulting a wide range of literature on animal feeding practices, including some that relate to the early nineteenth century, we settled on using the recommendations reported in one quite comprehensive source: L.H. Bailey, ed., "Animals," Cyclopedia of American Agriculture, vol. 3 (New York, 1908), 100-01, 107-08, 432. [27] We should not overemphasize the value added by animals to feed. Respondents to a questionnaire circulated in 1850 by a select committee of the Legislative Assembly of Canada were divided over whether it was

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F. Lewis and M. Mclnnis more profitable to sell coarse grains and hay or to feed them to animals. See Canada, Legislative Assembly, "Report of the Special Committee on Agriculture," Journals 1851t appendix J.

[28] A further source of bias for which the method does not adjust would be in systematic differences between districts in the efficiency with which feed grains are converted into livestock products. We would have failed to prevent the estimate from being biased in favour of the French if the English farmers followed practices that allowed them to get larger outputs of animal products from given inputs of feed. This could result from their having better varieties of animals, or having better knowledge of proper timing in the feeding of animals. It is not at all clear that such differentials would have been in favour of the English. For example, in an age when cattle were generally low-grade stock, French-Canadians were known to have kept a notably thrifty variety of milk cow. Its milk output was low but the milk was high in butterfat and the animals required less feed than the general purpose varieties of cattle kept elsewhere in North America. [29] Land "under cultivation" was specified as land in crop, pasture, garden, or orchard and was equivalent to all land not designated as "wild or woodland." [30] These values are shown in the Appendix, Table 2, available on request. [31] The value of farm implements was not reported in the Canadian census of 1852. In 1861 the value of implements amounted to only 5 percent of the value of capital in the form of livestock. We have assumed that in 1851 the relative importance of capital was about the same as a decade later and have augmented the value of livestock in each district by 5 percent to provide a crude allowance for implements. [32] This fraction is the proportion of agricultural workers, ten to fourteen years of age, multiplied by 0.286, the weight derived by Ransom and Sutch for juvenile agricultural labour in the American post bellum South. See R. Ransom and R. Sutch, "The Impact of the Civil War and of Emancipation on Southern Agriculture," Explorations in Economic History (1975) 12:23. There were differences between districts in the coverage of reported occupations, primarily owing to variations in the treatment of the youngest and the oldest workers. We impose a degree of uniformity by assuming that ninety percent of the male population aged fifteen to seventy had an occupation and adjust the number in each of the five occupational categories proportionally. [33] For a very few counties there exist no district-level data on occupations. In those cases the number of agricultural workers is computed at the county

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level from published census data, in the same manner as the parish-level approximation described above. This estimated county agricultural work force is then allocated to districts within the county in proportion to the number of farms of more than ten acres extent. Almost all of the recorded "farms" of less than ten acres are residential garden plots of an acre or less, occupied by persons reporting an occupation other than farmer. The frequency of these small plots varies widely from district to district. [34] Minor exceptions would be maple sugar, which was a significant component of output in only a few districts, and wool, since sheep would sometimes have been run on wild land. [35] Although draft animals were used on uncultivated land, we make no adjustment to the capital input. The reason is that we base our estimate of the number of draft animals solely on the number of cultivated acres (see the appendix to this paper, available on request). [36] This specification is consistent with Cobb-Douglas production functions for output produced on each of improved and unimproved land, and is premised on a rational allocation by farmers of their resources such that they equate marginal value products of inputs applied to either improved or unimproved land. It follows that the output elasticities of factors will equal the factor income shares. For example:

where Q+ is output by type of land; T» is land input; r$ is the return on land; and w is the wage rate; a* and 7* are the output elasticities of labour and land respectively; i = I for improved land and 2 for unimproved land. The prices of output on improved land are normalized to one. It then follows that:

In equation (3):

[37] We explored the possibility that the ratio of unimproved to improved land in 1852 was inversely related to land quality since that could also account for a significant b coefficient. We ran two separate regressions, one for districts shown by twentieth-century soil surveys to have higher proportions of poor quality land and one for the remaining districts. Both

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F. Lewis and M. Mclnnis regressions yielded statistically significant 6 coefficients of about the same magnitude as the one estimated from the entire sample. It should be added that according to modern soil surveys there was no difference in the quality of land between districts according to the ethnicity of their occupants in 1852.

[38] Note that a = Q/L since, if TU = 0, all output is the product of improved land. [39] The second restriction is imposed to force the coefficients on land and capital to assume "reasonable" values. The restriction embodies two assumptions: first, that the ratio of the value of land to the value of capital was the same in 1851 as in 1861; second, that the rate of return on land, per dollar invested, was the same as on capital. [40] The relatively high F-statistic indicates that the estimated coefficients are biased. Because of that and our concern that the rather low estimated value of labour's share may be favouring the more labour-intensive French agriculture, we change our procedure slightly. The subsequent discussion relies on assumed values of factor shares, introduced as weights in our productivity equation, and covers a wide range of values. [41] It may be worth noting that this result is fairly robust to modifications in the measures of input and output. In the process of carrying out the research we had occasion to revise several times what we thought was the best way to measure the input and output series. In no case did we get a result remarkably different from that reported here. [42] This differential is greater than that estimated in equation (6), mainly as a consequence of variations in the size of the districts. In estimating equation (6) all districts were treated as representing the same number of farms. It happens that a few large English districts were also among the most efficient. These get a greater weight in the calculation underlying Table 2 than they do in the regression estimation. The difference might be phrased as involving that between a comparison of farms rather than a comparison of districts. [43] The value of labour's share (0.355) in equation (6) is toward the lower end but certainly not outside the range of values obtained in other agricultural production function studies. [44] The result for Region II (Table 2, line 3) is particularly interesting. This region, just south of Montreal, was the one most frequently visited by nineteenth-century travellers and commentators on the backwardness of FVench-Canadian agriculture. It was there that the habitant farmers were

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claimed to have been especially resistant to adapting the superior farming practices of their English neighbours. [45] By far the most efficient farming was to be found in the English townships of the county of Stanstead. This was an upland, cattle-grazing district, located in the southeastern corner of the province, remote from the Montreal market but with commercial links to New England. There was no French district that was comparable in terms of location, land characteristics and market ties. At the other end of the productivity scale were a few French parishes in the counties of Nicolet and Yamaska, the outlying French district in the western part of Region IV. They were quite recently settled districts with unusually small farms in an area of rather poor soil. They were remote and quite different from any of the English districts of Region IV. [46] Further tests of the relative efficiency of French and English farming should be carried out. Estimates could be made for other census years to check the consistency of our results. The manuscript census data might be used to examine individual farms in regions where French and English were farming in close proximity. If these conclusions hold up it will be necessary to look more closely at the agriculture of Lower Canada to discover just why the French-Canadian farmers were performing better than so many commentators believed. [47] It could be argued that the seasonal nature of agriculture allowed work on unimproved land to be done in off-peak periods with little or no reduction in labour time available for application to the production of improved land. Certainly the clearing of land and cutting of timber was predominantly a winter occupation, but then so was the threshing and hauling to market of the crops grown on cultivated land.

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Part Three

Transition to Industrial Capitalism

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Trends in the Business History of Canada, 1867-1914 R.T. NAYLOR The period from 1867 to 1914 has attracted a disproportionate share of Canadian historians' attention, and for good reason. It was an era bounded at one end by the consolidation of the state structure of federated British North America, and at the other by the country's reluctant entry into the twentieth century. It was the era when the foundations of state and nation, economy and society were laid in place. It witnessed the consolidation of the economy on a transcontinental basis—commercial and financial integration, the completion of the main pieces of infrastructure necessary for the wheat economy that followed, and the interrelation of the various regional economies into a national whole based on a clear division of economic function among them. It also saw the consolidation of the main political apparatus—the departments of government, an initial vertical division of political function among various levels of government, and the establishment of national political parties, the political developments being of course directly derivative from the economic ones. These events transpired in and were decisively influenced by a world economic order in the process of radical change. The Pax Britannica reached its apogee at mid-century, and had begun its inexorable decline by the time the Canadian economy and policy were consolidated. Canada as a nation-state, economically and politically was the creation of a Victorian order already in decay. History is primarily a means for understanding the present; indeed the only path towards such an understanding. Our current structures, for good or bad, are explicable in their functioning only in terms of their origins and evolution over time. Hence the volume of attention given to the period stretching from Confederation to the great squabble over the division of the world's spoils in 1914-1918 makes good sense. In terms of volume the historical literature on the period is massive. But it still exhibits many serious gaps especially in the field of business history and general economic development. A deluge of material continues to be turned out on the lives of politicians. But these politicians were, in the great majority of cases, businessmen too. G. Brown's politics and ideological position can hardly be separated from his position as de facto leader of Toronto big business. His timber, land and railway interests, his position as publisher of Canada West's largest newspaper—these were the foundation of his politics. G.E. Cartier, who was, along with F. Hincks, a founder of the corporate welfare state in Source: R.T. Naylor, "Trends in the Business History of Canada, 1867-1914," Canadian Historical Association, Historical Papers (1980), 255-67.

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Canada; C. Tapper, who appears to have entered politics as a man of modest means, and managed, remarkably, to leave it very rich without a single major scandal to blemish his career; W.S. Fielding, who represented certain coal companies in Halifax and in Ottawa; these and many more have drawn long analyses of their political antics almost entirely detached from their personal business interests or those of the class of men they represented in Ottawa or the provincial legislatures. Only in the cases of F. Hincks and A.T. Gait, of the major political figures of the nineteenth century, have business and politics been at all properly integrated—and even then a lot remains to be said. The economic literature of the period is also wanting in many important respects. Certain variables have been examined at length—the impact of the tariff, land settlement policy, some facets of banking development. But many more have been totally neglected and the interrelations between those parts that have been studied have been inadequately examined. Finally on the subject of the literature, the task of pulling together the two elements mentioned—the detailed examination of many interrelated facets of the pattern of economic development, and the role of the government and therefore of the political leaders of the period who were also businessmen or represented businessmen in shaping these very patterns—has barely begun. It was with a view to trying to move towards that integration as well as detailing some neglected patterns of development that The History of Canadian Business1 was written. It is a very rough book in many ways. Many threads of argument are incomplete. A great deal of supplementary work is needed to confirm and to expand on the issues raised, and to round out the history. For these lacunae, and for the many patches where the work is dull and obscure—neither of which any facet of Canadian history is entitled to be—an apology is due the reader. The length too is likely excessive. And there are factual errors as well as errors of interpretation that are obvious to me even so soon after its publication. Apologies are due for these as well. I make no apology, however, for the methodology. It is deliberately nonquantitative, even anti-quantitative, for the very good reason that the derivative essays into the field of quantitative economic history witnessed in Canada of late generally ask all the wrong questions and then try to answer them with the wrong set of assumptions. The results vary from the tedious to the absurd—the "what if the Prairies were made of rock" school. The economy is an instituted process, and what is needed first and foremost are institutionally oriented studies. This I have attempted to do, and have eschewed quantitative techniques in favour of what might be called a literary variant of the minimum information-maximum likelihood method. Indeed if I had had my choice in the matter I would have carried my antiquantitative convictions to the point of even omitting the page numbers.

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Within the period under review (and beyond to the present) two inextricably interrelated themes characterize the economic development of Canada. First there is the cosy relationship between business and government, or more concretely between big business and government, for Canadian governments and their policies have been especially sympathetic to the needs of the mighty, and Canadian government policy has been directed squarely at accelerating the process of concentration of economic power. Second, and closely linked to the first, is the central role of foreign capital—to build infrastructure, finance staple extraction, and establish manufacturing capacity. The attraction of this foreign capital has been a prime preoccupation of Canadian governments. All manner of policies have been concocted to facilitate the inflow of outside investment preferably in big prestigious projects which generate a return flow of political capital to the governments' responsible. Both of these attributes of Canadian development have deep historical roots; deeper than is often appreciated.

Government and Big Business Before Confederation The federal and, to a lesser degree, the provincial and municipal governments were crucial instruments for the fostering of capital accumulation. As H. A. Innis very aptly put it: Where capitalism followed the more rigid channels of surviving commercialism, or where it arrived later in a highly centralized state, it was part of governmental machinery. In Germany, Italy, and Japan, and in the British Dominions, the state became capital equipment. Because of the central role of the state in the process of accumulation, politics turned in large measure on the struggle of various business interests to capture control of the state structure in order to turn it to their advantage. The tight interface of government and big business was based on their complementary objectives (not to speak of personnel). Business sought to use the state as an instrument of financing business activity and to restrict competition; government sought to use big business as a source of direct political support during election campaigns and to generate the visible economic returns—growth, rapid industrialization, and job creation—that could be dangled before the electorate in the late nineteenth century and beyond to the present. The use of the state as an instrument of capital accumulation is in evidence in Canadian history from the earliest years of the French regime. Indeed in the very early years business and government were identical, jointly embodied in the fabric of the monopoly chartered trading and colonization company. Throughout the French regime, after 1663 when the state and commerce were formally divorced, the state was active in subsidizing large-scale industry di-

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rectly through long-term investment—as in iron and steel and shipbuilding, and indirectly by virtue of being a principal market for the products of these industries. The state was equally active in the staple trade, regulating entry to restrict competition, and defending the trade routes that were essential to the prosecution of that trade. Not surprisingly, despite the formal divorce of commerce and the state, those most directly interested in the successful prosecution and monopolization of the trade were also the dominant influence in the state structure itself. Not for nothing was the Sovereign Council of New France referred to as the "Beaver Aristocracy." The Conquest imposed a new set of government-business relations. The struggles of the Lower Canada Assembly against the mercantile elite that controlled the Executive Council, the Family Compact of Upper Canada and its links to the Bank of Upper Canada, the Welland Canal Company, and the Canada Company, and the domination of Halifax's Council of Twelve by the leading wholesale merchants and West Indies traders of the city are well known and need no elaboration here. Suffice it to note that, especially in the field of banking and transportation infrastructure, the use of the state to defend monopoly and divert public funds to private purposes was well known and well rehearsed in the early years of British rule. But more important than these pioneer episodes were the new set of state functions assumed in the 1840s in the Province of Canada. As Britain loosened its grips on the political process in the colonies and as the movement towards responsible government progressed, an indigenous business class for the first time gained virtually unrestricted access to the mechanisms of the state, to control of taxation and expenditure, to use of the state's credit for borrowing to finance private enterprise, to manipulation of currency and banking law. It was the era of the triumph of the "Reform" forces in the political process, and, as in Britain during the great age of "Reform," it witnessed a systematic and thorough corruption of the state structure. The Assembly fell into the hands of promoters whose purpose was to lay seige to the public purse and carry it by storm. It began on a small scale in the Sydenham era with an individualistic scramble for contracts, offices, and government cash grants for road building and the like. Lord Sydenham's description of the process is worth recalling. In a letter to Lord J. Russell he exclaimed, You can form no idea of how a colonial parliament conducts its business. I got them into comparative order and decency by having measures brought forward by the Government, and well and steadily worked through. But when they came to their own affairs, and above all to money matters, there was a scene of confusion and riot of which no one in England can have any idea. Every man

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proposes a vote for his own job; and bills are introduced without notice and carried through all their stages in a quarter of an hour. At the time Sydenham wrote, England was in the throes of the Hudson railway mania, and hence it is quite likely that, contrary to Sydenham's contention, a good number of eminent British politicians knew precisely about what he was talking. As to Sydenham, being the architect of the spoils system in Canadian politics he was the last person who should have been shocked at its consequences. But, as G. Myers aptly put it, Sydenham was no doubt impressed by their primitively uncouth methods as compared with those in England where the most flar grant jobs are put through with a polished ease and leisurely equanimity, thus covering them with a nice gentlemanly elegance. Centuries of experience have taught this as a fine art. The stakes in the game mounted rapidly as railway fever swept British North America in the late 1840s and early 1850s. Canada in particular embarked on an investment program that far eclipsed that of the canal-building phase of two decades earlier. The role of the state in the first wave of railway building was twofold. First, by controlling the distribution of charters the state could directly determine the presence or absence of competition, generally the latter. Second, the state put its tax revenues and borrowing power to work to finance the construction of railways directly through cash aid and indirectly by pledging its credit on behalf of private investors in the form of guarantees against the failure of the private sector. The aftermath of the railway-building orgy was felt in a number of critically important ways. Commercially its effects were twofold. Canada was more firmly integrated into the Atlantic economy during the Age of Steam and Steel. At the same time internally many new centres were opened to staple exports and for imported manufactures. Financially—and politically—the province came more solidly under the control of British financial interests at exactly the time when formal decolonization of certain parts of the empire by the British government was at its zenith. In terms of internal politics a number of changes resulted. A hardening of party lines followed from the struggle of major cities to use the railway to control and extend their respective commercial hinterlands; at the same time public office became the easiest route to fast fortune. "Responsible government," that is to say, the subservience of ministries to the swarms of promoters who crammed the Assembly floor totally transformed the role of the state in Canadian economic life. The most important function for which the Canadian governments became "responsible," in all senses of the term, was the servicing of the massive public debt the railway age engendered. And the most important political after-effect of the railway age was Confederation itself, a political event whose genesis is inexplicable without reference

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to the second major theme, the crucial role of outside investment in the pattern of economic development of which Confederation was a part. Again as Innis aptly put it, "Constitutions, statutes, supreme court and privy council decisions are credit instruments." Confederation was very explicitly an act of public finance reflecting Canadian business and political leaders' preoccupation with and commitment to the maintenance of confidence of outside investors.

Foreign Capital and Canadian Development Before Confederation The concern of Canadian politicians and business leaders with maintaining a congenial climate for foreign investment also goes back to the earliest years of settlement. External investment in fact was inseparable from the colonial state apparatus itself in the opening years of the French regime—once again monopoly chartered trading and colonization jointly embodying both. After 1663 with the formal divorce of commerce and government, an influx of French government subsidies monies was essential to the maintenance of government activity, the development of trade infrastructure, and the building up of several key industries during the French regime. On private account, external funds came in chiefly in the form of long credit for the plying of the wholesale import trades and for the financing of the fur trade. After the Conquest, as was typical of British external investments of the period, British funds replaced French in much the same categories. Prior to and during the Napoleonic Wars the flow of British capital to the outside world largely took the form of government expenditures abroad—for military purposes, subsidies to allied governments, or for the maintenance of the colonial governing apparatus. The only sizeable private outflow took the form of mercantile credit extended from British firms to their overseas agents, and from the agents to those prosecuting the staple trades abroad. In Canada, after the Conquest, advances of credit from British houses and from the British government were essential to the consolidation of economic power by the anglophone merchants who descended on the colony. British military expenditure provided one of the most important markets for the Canadian farmer, habitant, and pioneer anglophone alike. The central role of outside funds, especially from British government expenditures in British North America, in generating prosperity was made clear to all during the Napoleonic and French Revolutionary wars and the War of 1812 with high prices for timber and grain guaranteed by a flood of British military expenditures. The identification of prosperity with a steady inflow of outside capital and therefore the concern to maintain the state of international relations that guaranteed that influx was common to most, if not all, of British North America. In Halifax it was well known that war brought prosperity as a result of the surge of British military expenditure: peace, on the other hand, meant depression. Hence in

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times of peace the cream of the city's mercantile community would gather in a local coffee house and denounce the government, calling for "loud war by land and sea." And it was contended that the late eighteenth- and early nineteenthcentury Canadian farmer's liturgy contained a double-barrelled prayer—for a bountiful harvest and a bloody war. The postwar years saw the structure of British capital exports change from government expenditure abroad to private loans flowing via the merchantbanking firms to finance canals and state-related infrastructure abroad. While the great bulk of the long-term private funds that now flowed out of Britain for the first time went to American state and canal company bonds, the Province of Canada managed to secure some British investment for the St. Lawrence canalization project, especially the Welland Canal. Canal building and financing, prompted by the shift of the staple basis of the economy from furs to timber and grain, represented a watershed point in Canadian financial history for several reasons. It saw the first major instances of long-term private outside capital investment in Canadian history (excepting the old chartered trading company phenomenon, which was in more than one respect a type of pristine offshore financial operation). Both American direct investment and British portfolio capital were involved: in addition the state for the first time pledged its credit on a long-term basis to a private enterprise. Finally as a result of the canal financing debacles in 1835, the first issue of sterling debentures was undertaken in a deliberate effort to shift the Canadian public debt from the province to England in order to free local funds for other investments. It set the pattern which has been followed persistently since—the pattern of financing heavy works of infrastructure abroad via long-term borrowing while Canadian capital moves into shorter-term investments. Of course other types of British capital were also present during the canal building era. British funds were earnestly courted for the banking system by Tory and Reform interests alike. The flow of credit from British firms to agents in Canada to finance the exchange of manufactures for staples was still the foundation of transatlantic trade. Indeed this era saw what may well be the first articulated opposition to the dominating role of foreign capital in Canadian financial history, in the form of William Lyon Mackenzie's wellknown observation that: Our foreign commerce, confined and shackled as it is, and has been, is entirely in the hands of the British manufacturers. Our farmers are indebted to our country merchants, our country merchants are deeply bound down in the same manner and by the same cause to the Montreal wholesale dealers. Few of these Montreal commission merchants are men of capital; they are merely the factors of agents of British houses, and thus a chain of debt, dependence, and degradation is begun and kept up, the lines of which are in fact bound

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The late 1830s and early 1840s saw a virtual cessation of the flow of British long-term funds to Canada. In addition to the legacy of the political turmoil in the Canadas, the American state repudiations and the collapse of N. Biddle's cotton bubble considerably dampened the enthusiasm of potential British investors in North American securities. At the same time the beginning of the British railway mania provided a domestic investment outlet for surplus savings. In Canada the response had been efforts to ease the chaos in the public finances and bolster the saleability of government debentures by such devices as the Act of Union. But the reluctance of British capital to venture to Canada without, and sometimes even with imperial government guarantees caused protracted problems for the financing of major public works projects. It further accentuated the depressed conditions of the late 1840s when even British short term funds fled the tottering colonial economy. It also precipitated a search for new sources of funds especially given the rising tide of railway fever then sweeping the province. One of the principal responses to the commercial crisis and the curtailment of British investment that went with it was the Annexationist Movement. Far from being an ideological aberration, the movement had a consistent economic philosophy, and a clear view as to how to resuscitate the ailing provincial economy. Its manifesto heralded annexation on the grounds that "The proposed union would render Canada a field for American capital into which it would enter for the prosecution of public works and private enterprise as into any of the present states." It called explicitly for Canadian development to be predicated on the spillover of the industrialization process then in train in the northeastern United States. It stressed the necessity of access to the United States market to stimulate investment of American capital in Canada to alleviate the then high level of unemployment. American investment too would build the great railway works then projected for the colony. All of these protestations have a remarkably familiar and contemporary flavour. The revival of commerce after 1849 and with it the influx of British capital fleeing the collapse of railway building in England stifled the annexationist alternative for the time being. In fact the flood of British investment and soaring international demand for Canadian grain and timber produced nearly a decade of unprecedented prosperity. With the spread of railways across the province came the accumulation of liquid fortunes in the hands of indigenous capitalists based largely on the loot of the public purse, which purse was steadily replenished by overseas borrowings—until the Crash of 1857. For the next decade economic progress was irregular, the public finances often in chaos, and the

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provincial government besieged by mendicant railway lines and jittery British bondholders. The stage was set for Confederation.

Confederation and Beyond Confederation, as is now widely accepted, was an elaborate exercise in public finance designed to shore up the creeky credit of the Province of Canada and reassure British investors in Canadian government and railway debentures. Opponents and proponents of the scheme seemed to agree on that point at least. Again the traditional alliance of big business and government, of railways and banks on the one hand with a chaotic state of public finances on the other, was at work. And again the international flow of financial capital was the central preoccupation. The concern with the condition of the public debt dictated the new state structure—federal control of the obvious tax sources, banking and currency, the debt consolidation, and the disallowance power—all had an obvious utility in bolstering the saleability of Canadian securities. And they were reinforced by other policies, by the use of the state guarantee principle and the eventually successful struggle to gain access to the British Trustee Lists for Canadian government debentures. Such a plethora of policies was necessary in light of the sorry record of earlier British investment in Canada and the existence of attractive alternative investment outlets elsewhere in the world. After recovery from the crash of 1873 British funds began moving around the world on an ever-increasing scale, into government bonds, railways, utilities, and land in particular. While such investments were present in Canada in all of these categories, they were nowhere available to the degree Canadian business and political leaders had hoped. First Australia, then the Argentine and South Africa drew the British investors' attentions to the possibility of investment in the empire, formal and informal; and all the while the United States remained the largest single recipient of British funds. It was not until the Klondike gold rush focussed world attention on the possibilities of the Canadian West that Canada's prospects for British investments improved. And the main inflow still had to await full recovery and the initiation of the construction boom after the turn of the century. Thereafter until World War I, Canadian development floated atop a wave of British capital that in some years equalled in value 50 percent of total domestic gross fixed capital formation. At the same time American investment in Canada had begun assuming significant dimensions. American investment in Canada from the beginning was oriented more to direct than portfolio movements, and hence assumed radically different patterns than British. While British capital movements to Canada reflected the state of development of organized capital markets in Britain, American penetration into Canada reflected the stage of evolution of the American industrial

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base. In the period of American growth after the War of 1812 the mode of production, with a few dramatic exceptions, remained essentially handicraft. The market was local while the "firm" itself was mobile; fixed capital investment was minimal, and the technology required was embodied in the skills the master-craftsman carried in his head. Just as master-craftsmen moved across the United States so they moved as well to Canada, especially to southwestern Ontario. Capital in the financial sense did not move with them, but the capital requirements of handicraft production could be met by local partnerships or suppliers' credits. Capital in the financial sense in later decades did, however, follow the trail they had blazed. A number of important Canadian industries owed much of their origins to the migration of American entrepreneurs, agricultural implements and distilleries being two of the most prominent in secondary industry. There were during the same period important American incursions into the resources field, especially lumbering in the 1840s and beyond, and petroleum in the 1850s and 1860s. As the American firm began to grow beyond its handicraft roots, and as its markets widened, the problem of defending its techniques against interlopers began to be an important preoccupation. From the 1850s on, concern with licensing of techniques and the protection of industrial secrets mounted. Such a concern indicated two prior developments—the existence of regional as opposed to local markets and the growth in the size of firms as well as a marked shift towards wage labour/capital rather than handicraft style relations of production. Under the apprentice-journeyman-master sequence the transfer of technique was not only impossible to preclude, it was the very raison d'etre of the system. Canada showed itself very willing to capitalize on the difficulties of American firms in preserving industrial secrets, and the laws openly encouraged the pirating of techniques. Such theft of industrial techniques supplemented, and to a degree supplanted, the role of the migrating American master-craftsmen in bringing American industrial techniques to Canada. The next stage in the movement of American industry to Canada came with the development of the horizontally integrated national firm that emerged along with the national market. Both were the products of the age of steam and steel—of the railroad, steamship, and telegraph and all that these three kindred innovations portended. With the growth of the size of plant and the potential for national and international marketing came a vigorous sales campaign at home and abroad. For Canada it meant two things. It meant a flood of American imports in some lines and the emergence of licensed ventures in Canada to produce American product lines locally. After the tariff of 1879 a few branch plants were added. All these cases—exports, licensing of Canadian affiliates (often promoted by Canadian merchants who had formerly imported the product line) and early branch plants—were manifestations of the drive for markets by the newly emerging American national firms.

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Next came the age of the trusts in the United States, in the context of the depressed 1880s. The reaction of American business to the secular deflation and profit squeeze was twofold. First, pools and trusts were formed to cut price competition—these trusts often extended across the border to include Canadian independent firms in continental cartel arrangements: over time the cartel turned into a full-fledged merger in which the Canadian component was reduced to the status of a branch plant. Second, came a desperate search for the means to cut costs to preserve profit margins, the vertical integration movement; and one of its most prominent manifestations was the search for new, cheap raw materials. As a result American capital moved into new resource fields in Canada—in some facets of mining and new timber lands. Finally came the post-1893 merger wave in American industry when the vertically integrated national firms coalesced into multidivisional firms as the industrial depression of the mid-1890s led to a scramble to unload surplus stocks abroad—and a concomitant proliferation of sales agencies abroad, including Canada, some of which evolved into producing affiliates. It also saw the multidivisional merger wave reach across the border to absorb formerly licensed affiliates into the new organic corporate entity. Out of the multidivisional firm came the first wave of multinationals. The new moves were especially heavily concentrated in the modern industries that typified the second industrial revolution—chemicals, electrical products, automobiles. From the beginning these industries in Canada were foreign-controlled either via licensing or outright ownership. By World War I the patterns of Canadian industrial dependence were already in place—Canadian control of backward and consumer-goods industries, American control of modern and producer-goods industries, a pattern continued to this day. All of this was ably assisted by government programs, tariffs, patent laws, subsidies, and the like. Of course encouraging the influx of foreign investment to finance development schemes of various sorts was far from the sole function of Canadian federal governments of the period, albeit an important one. On the domestic front a number of important roles were also played—but these too had historical roots. Sir J.A. Macdonald's career after 1867, spent consolidating and manipulating the centralized political structure created at the time of Confederation, was a firm continuation of the Hincks-Cartier tradition. It developed that mutually reinforcing set of government—big business relations within the context of "responsible" government that those two joint founders of the Canadian corporate welfare state had initially created. Under Macdonald the Conservative Party's power base was built on the unbeatable alliance of the Bank of MontrealCanadian Pacific Railway (CPR) forces with the organized manufacturers in the Canadian Manufacturers' Association, and was generalized through the lower echelons of political-economic power by the distribution of contracts and offices under federal control. Centred on the departments of Public Works and

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Railways, the spoils system ran rampant under Macdonald's tutelage. As Sir J.A. Macdonald, in an address to a group of businessmen, quaintly phrased it: Tell us what you want and we will give you what you need. The politician is the little boy who climbs the tree to shake down acorns to the hogs below. The squalid record of the Macdonald ministries need not occupy us here, it is readily available for perusal to anyone who skips the biographies and concentrates instead on the evidence. Suffice it to note the character of the Langevin-McGreevy operations in relation to the public works department and the ensuing set of scandals that rocked the later Macdonald governments. The sordid saga of the career of O.E. Murphy is also a good illustration. Murphy was an excise commissioner in New York during the literally golden year of Tammany Hall. He left the city in a hurry one day with a shortage of some $50,000 in his accounts. With such credentials he came to Canada and went into the contracting business in close association with Macdonald's minister of public works. When the chief contact man was duly sent to prison, Murphy returned to New York pledged to make good the old shortage. He was asked by a New York Times reporter how his fortunes had fared so well in Canada to which he made his immortal reply: "We bribed them all and generally acquired nearly everything in sight. We literally owned the Province." And if the public works gang had not fallen to internal bickering over the division of spoils, Murphy was convinced that in a few years, "We would have owned the CPR and nearly the whole of Canada." Naturally such activities had deeper consequences for the functioning of the Canadian polity than simply the corruption of the civil service. For the population as a whole duly apprised by their political leaders of the correct principles of Canadian political behaviour responded appropriately. Murphy was asked for his opinion of the moral condition of the Canadian electorate as compared to that of the United States, and he replied, "Votes cost more (in Canada) than in New York. I figured in one election where . . . votes cost $25 to $30 apiece. I considered this price somewhat high, but we had to have them." Patronage under both Macdonald and Laurier hinged critically on the railroad and the building of other forms of infrastructure prerequisite to the opening of the West. Once such social overhead capital was in place the balance of patronage dispensation shifted to the provinces. The direct dispensation of patronage was only one facet of the process of cultivating close relations between business and government: it was undoubtedly the most sensational, but in the long run not the most important. The Macdonald years are better remembered as the period when the corporate power structure we currently live with had its foundations set. In the financial sphere the emergence of the Canadian Bankers' Association with its power to set interest rates, establish spheres of influence, and restrict competition was

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the outstanding event. Not only was financial legislation so drafted as to systematically eliminate private banking institutions and escalate the minimum permitted size of chartered banks, not only did the bankers1 lobby itself virtually and sometimes literally write the very legislation by which the banks were ostensibly regulated, but the Bankers' Association was even given the direct de facto power to pronounce on the fitness of applicants for new charters and therefore block the entry of competitors into the field. In the field of transportation the major event was the completion of the first transcontinental railway. Here the role of the federal government was twofold—overseeing the conversion of public funds into private profit and the enforcement of monopoly to assure profitability and facilitate the sale of securities to foreign investors. In the realm of land settlement concentration of power was again the federal government's objective: the West became a vast patronage dispensing machine in which the privileges and grants of large-scale colonization companies run by the party faithful or the equally loyal CPR and Hudson's Bay Company forces made a mockery of any notion of opening the West to a flood of homesteaders. In the field of industrial development, concentration of economic power was again liberally assisted by federal policy—both its presence in the form of high and rising tariff walls and its absence in the form of enforceable combines policy. In banking and finance, transportation, land settlement, and industrial development strategy, in all of the traditional pillars of the national policy but immigration policy (where by definition it was impossible) did the federal government show its predilection towards abetting the concentration of economic power. All this was equally true of the Laurier government that succeeded the decaying Tory machine in 1896 with the important departure that the Bank of Commerce-Canadian Northern Railway alliance replaced the old Bank of Montreal-Canadian Pacific Railway group as the dominant set of corporate interests in Ottawa. Big government, big business, and foreign investment, the holy trinity of Canadian political economy, were deplored in public and encouraged in private. Recurrent outbursts of populist antagonism to "the interests" alternated with fits of misdirected nationalist fervour directed against "American" control, but the facts of Canadian economic life remain obdurate. "The interests" remain in control; foreign investment continues to grow; and no major political force in Canada has ever shown the courage or the wisdom to seek to change the structures that result. Nor indeed does any significant development that would produce the strength of mind to force a drastic restructuring of the basis of our national economic life seem on the agenda for a long time to come. But as historians it is our duty at least to help delineate the nature of the problem, even if the solution must await the action of others.

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Notes [1] R.T. Naylor, The History of Canadian Business, 1867-1914, 2 vols. (Toronto: 1975).

The Working Class and Industrial Capitalist Development in Ontario to 1890 G.S. KEALEY, B.D. PALMER In the conclusion to his analysis of capitalist development in Russia, V.I. Lenin succinctly pointed to the twofold historic role of capital: first, to increase the productive forces of social labour; and second, to stimulate the socialization of that labour. Both of these processes, however, manifested themselves in diverse ways in different branches of various national economies. This chapter seeks briefly to outline aspects of this historic role of capital in Ontario, and set the stage for the following discussion of the Knights of Labor. For across the province the late nineteenth century witnessed the first truly unambiguous stirrings of industrial capital, and these years would serve as the crucible from which Canada as a whole would emerge as an indigenous capitalist economy and society. This momentous shift in the nature of productive relations, as Lenin argued, led "to a change in the mentality of the population," as the spasmodic character of economic development, the rapid transformation of the methods of production, of personal dependence and partriarchalism in social relationships, the mobility of the population, and the influence of the growing industrial centres all culminated in profound alterations in "the very character of the producers." In the Ontario of the 1880s and 1890s the rise and fall of the Knights of Labor was at the heart of this process of change.1 To argue the importance of the Canadian industrial revolution of the mid-to-late nineteenth century is to confront one of the well-established conventional wisdoms of the peculiarities of the Canadians. For the founders of the staples approach to Canadian economic development, an approach that has blossomed into an internationally accepted tradition of political economy, paid little attention to the nineteenth-century origins of Canadian industrial capitalism. The pioneer of this approach, W.A. Mackintosh, held that industrialism awaited the spin-off effects of the turn-of-the-century Laurier wheat boom that would usher in a century destined to be Canada's. For the muchcelebrated H.A. Innis the country's capitalist experience was to be distorted by the demands of the pervasive American capital that flooded the country. Curiously, both authors shared a focus on the early twentieth century and both ignored, in large part, the earlier industrial revolution that had taken place in central Canada in the period from the 1840s to the 1880s. Recent scholarship in this mainstream of the political economy tradition has begun to pay attenSource: G.S. Kealey, B.D. Palmer, Dreaming of What Might Be: the Knights of Labor in Ontario, 1880-1900 (Cambridge, England, 1982), Ch. 1. Reprinted with permission.

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tion to the process of late nineteenth-century capitalist industrialization, and the concomitant creation of a Canadian working class. But it remains overwhelmingly concerned with the twentieth-century experience, and gives short shrift to the earlier role of capital and the emergence of factory production in the post-1850 years. In what must stand as one of the classic ironies of supposedly socialist historical investigation, some recent left-nationalist followers of Innis have been influenced by dependency theory and by the writings of Samir Amin on the character of capitalism as a world system, while, at the same time, they are all too willing to dismiss efforts to probe the nature and extent of industrial-capitalist development in Canada and its impact on working-class life as "Metropolitan Marxism."2 We stand as part of this Marxist tradition and look, not necessarily towards Mackintosh, Innis, and their current left-nationalist advocates (although all their work forces us to clarify our arguments and provides useful empirical detail), but in the direction of a dissenting scholarship that begins with the populistic muckraker G. Myers and his History of Canadian Wealth (1914), consolidates in the 1940s, 1950s, and 1960s with the pioneering efforts of Marxists H.C. Pentland and S.B. Ryerson, and continues with much recent work on the social, cultural, and economic experience of Canadian workers. In all of this work, the late nineteenth century stands as an epoch of capitalist transformation. And this dissident view receives impressive quantitative backing from a number of recent studies by economic historians concerned with the analysis of aggregate data and the extent of real manufacturing output. It would seem that it is no longer possible to deny the indisputable: that the latter half of the nineteenth century saw the creation of a sophisticated transportation network; that these years gave rise to considerable debate leading to the articulation of a strategy of industrial development that pinned the hopes of Canada's rising capitalist class on political consolidation, tariff protection, and settlement; and that a diversified manufacturing sector emerged in central Canada, dominating social life in the young Dominion.3 Contemporaries knew all this well, for as early as the 1860s the transforming power of capital had become visible in the rise of the steam-powered factory, often reliant upon mechanized production, as in the tailoring or boot and shoe industries. For the People Js Journal these were the hallmarks of economic vitality, factors which had "set agoing an industrial revolution." In the words of another exuberant authority, writing in 1866, Canadians were "pressing into an altered condition of things . . . THE MANUFACTURING ERA OF OUR HISTORY."4

An Industrial Revolution Between 1870 and 1890 the industrial sector tasted the fruits, both bitter and sweet, of this great transformation: establishments capitalized at $50,000 and over increased by about 50 percent; employment in manufacturing rose by 76

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percent and output in constant dollar terms by 138 percent; railway mileage increased from 3,000 in 1873 to over 16,000 in 1896; manufacturing's place, in terms of value added, rose from 19 percent of the gross national product in 1870 to 23.5 percent in 1890; the rate of real manufacturing output climbed from 4.4 percent in the decade 1870-80 to 4.8 percent in 1880-90 (although it slipped to 3.2 percent in the 1890s). Thus, the 1880s were an extremely significant moment in the historical rate of growth, surpassed only by the boom years 1900-10 and 1926-9. Indeed, it is the growth of manufacturing facilities in many industries during the cresting fortunes of the National Policy (1880-4) that is most striking. Between 1880 and 1890, for instance, the value of cotton cloth output rose by 125 percent, but even this dramatic increase understated the gains of the decade's first five years: the number of mills, spindles, looms, and capital investment in cotton cloth tripled in that short period.5 The creation of the new Canadian nation state in 1867, which we have argued elsewhere was central to the strategies of the Canadian bourgeoisie, led to a booster ism which knew few bounds. H.B. Small, a propagandist of the new order, looked forward in 1868 to the day when "judicious outlay of capital" would lead to national industrial self-sufficiency and to "a surplus for exportation to the West Indies and central and South America." After a detailed industrial tour of the Canadian heartland, Small predicted that "as our manufactories increase and accumulating capital seeks some means of investment, our future greatness and prosperity must increase also."6 The optimism pales for a few years at the height of the depression of the 1870s, although even in the stark years of 1874 and 1876 Canadian manufacturers lobbied for access to American export markets. But the 1878 National Policy election with the victory of the Tories' clear commitment to an industrial strategy promised better things for the industrial capitalist in the 1880s. Even a cautionary book, Sketches of the Late Depression, after delivering its moral homilies to business "that there is a higher, yet accessible plane of action for the class to reach in their dealings with each other," then went on to chronicle the recent successes of the National Policy tariff in fostering industrial growth.7 Ontario stood at the very centre of this process of capitalist development. Aggregate data (see Table 1) begin to tell the story: capital invested more than doubled in each decade between 1870 and 1890, while the number of hands employed increased 90 percent over the twenty-year period. These aggregate data can give us a rough measure of the character of social productive relations, the setting within which the Knights of Labor operated, and one which they must have influenced. Table 2 illuminates trends within the aggregate data for the years 18711911. However crude and unrefined the categories, they reveal important shifts and developments over the course of the period. If, for instance, we take capital invested as a percentage of value added, we note a steady increase over the years 1871-1901, with the decadal rate of that increase dropping precipitously

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G.S. Kealey, B.D. Palmer Table 1: Aggregate data, Ontario 1891-1911

Year 1871 1881 1891 1901 1911

Capital invested ($000) 37,874 80,951 175,972 214,972 595,395

Hands employed 87,281 118,308 166,326 151,081 216,362

Yearly wages ($000) 21,416 30,604 49,733 44,656 95,676

Value raw material ($ 000) 65,115 91,164 128,142 138,230 297,580

Value product ($ 000) 114,707 157,990 239,782 241,533 579,810

Value added ($ 000) 49,592 66,826 111,640 103,303 282,230

Source: Census of Canada, 1871-1911. Note that the 1901 and 1911 figures are unadjusted in light of the changing criterion employed by the census in enumerating manufacturing establishments. All firms were considered in the 1871-91 period, while only those firms employing five or more hands were considered in 1901 and 1911. The capitalinvested figures for 1901 and 1911 are computed by adding together the figures for fixed and working capital. There had been no distinction between these realms in the earlier period. Table 2: Trends within the aggregate data, Ontario 1871-1911 Year Capital as percent of value added Wages as percent of value added Capital as percent of product value Wages as percent of product value Per capita yearly wages Capital invested yearly per worker ($) Yearly national growth rates in manufacturing output (percent)

1871 76 43 33 18 245 433

1881 121 45 51 19 257 684

1891 157 44 73 16 287 1,057

1901 208 43 89 18 295 1.422

1911 210 33 102 16 441 2,751

—

4.4

4.8

2.4

6.0

Sources: Our calculations from census data. Note reservations in source note to Table 1. Yearly national growth rates in manufacturing output are taken from G.W. Bertram, "Historical Statistics on Growth and Structure of Manufacturing in Canada, 1870-1957," in J. Henripin and A. Asimakoapulos, eds., C.P.S.A. Conference on Statistics 1962 and 1963 (Toronto, 1964), 93-146.

in the opening years of the twentieth century. Wages, however, exhibit a different trend, and as a percentage of value added were relatively stable until they fell dramatically in the years 1901-11. When we take capital invested and wages as a percentage of the total product value other trends emerge: capital as a percentage of product value rises steadily over the course of the

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entire period, while wages as a percentage of value decline only in those years of most pronounced economic growth, the 1880s and 1900s. At the outset we need to comprehend the severe limitations of the data: trends and developments could be a consequence of many factors— technological innovation, more efficient utilization of capital or labour or both, market factors, price shifts, or the changing character of exploitation—and the lack of consistency in the criteria employed by the census, particularly in the treatment of the small firm, further complicates matters. Nevertheless, such data point, however hesitatingly, to important forces at work in the Ontario economy. First, we can see that wages declined as a percentage of product value precisely in those years—1881-91 and 1901-11—that the growth rates in national manufacturing output soared. This suggests a growing intensification of labour: that these periods, then, saw increasing organization among Ontario workers—first, in the Knights of Labor, and second, in the craft unions during the upheaval of 1898-1904—should cause no surprise. But to study the character of exploitation we must probe the relationship of wages to value added, considering the capital input. This leads us to our second speculative hypothesis: it would appear that the social cost of labour was relatively high throughout the course of the late nineteenth century, years which predated Taylorism, broadly conceived. It is not until the turn of the century that wages as a percentage of value added plunge, even in the face of soaring per capita yearly wages (largely a consequence of inflation, for real wages declined).8 These turn-of-the-century years also witnessed a virtual doubling of the capital invested yearly per worker, and, even taking the inflationary context into consideration, leave behind the more modest decadal increases in this relationship characteristic of the years 1871-1901. Yet, despite this mammoth dose of capital in the years associated with the beginnings of Canada's century, capital as a percentage of value added makes only a marginal, clearly insignificant, gain. Thus, although both the 1880s and the 1900s are years of economic growth and the increasing intensification of labour, it is not until the years 1901-11 that one sees the actual rationalization of productive relations, a shift in the character of exploitation, and the probable degradation of labour. Prior to this date the social costs of labour remained high, a phenomenon confirmed by recent unpublished work by J. Ferland.9 What gains in output did occur in the late nineteenth century were probably more a consequence of capital input than of extraction of surplus from the hide of labour, although these spheres are ultimately impossible to separate analytically. If this was indeed the trend, then it becomes important to ask what forces kept the social cost of labour high. Lack of a managerial strategy at the work place, "scientifically" conceived, was no doubt one reason, as was the weak technological foundation of production in the 1880s. The mass character of the Knights of Labor, as a movement aimed at uniting all workers, probably played a considerable role in resisting capital's quest to increase output and

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reduce labour costs through wage reductions or increasing the pace of work. The yearly per capita wage figures confirm this picture. While yearly wages rose only twelve dollars over the course of the 1870s and only eight dollars throughout the 1890s, the increase for the decade 1881-91 was thirty dollars, at least twoand-one-half times as great. To be sure, there are immense problems in such comparisons, for the decade 1871-81 starts near a peak in the economic cycle and ends as the economy is barely coming out of a trough, while the decade 1881-91 exhibits exactly the opposite trend. Nor do these calculations take into account in any sophisticated way earning power, severely reduced by the unemployment, short-time, and layoffs that accompany depression and recession, or speak to the question of the purchasing potential of these per capita figures, in real wage terms. This no doubt renders any systematic attempt to compare per capita yearly wage rates over the course of the late nineteenth century extremely difficult, and the project is rendered even more questionable in light of the impact of the depressions of the 1870s and 1890s. Nevertheless, the increasing employment of women and children throughout the 1880s, at wages much below the male rate, as well as the deflationary context, offset some of the inherent biases in the data. But even granting all of the ambiguities in this admittedly speculative and tentative argument, much of the data points toward the high social costs of labour in the late nineteenth-century period; labour seemed relatively better off in these years, in terms of its capacity to extract a larger portion of its product, that it would in later times, when capitalistic appropriation was undoubtedly more refined and effective. The social relations of production, in which worker stood counterposed to employer and in which the nature and extent of organization was of vital importance, must have contributed to this outcome. Such developments took place, moreover, within the context of a general decline of prices which, using MichelPs price index, plummeted from roughly 100 in 1873 to a low of about 75 in 1886. We know little about the social impact of this long-term decline in prices, but if the experience of the United States is at all representative, we might well speculate that although real wages no doubt rose, employers responded to deflation with increased application of technology, intensification of labour, and, most importantly, wage cuts. The latter would have been most prominent in the troughs that a number of economic historians have located around the years 1879-80, 1885, and 1888. Across south-central Canada the strength of the Knights of Labor may have helped to create a situation in which the working class kept wage rates at least partly intact, inhibiting capital's assault and resisting employer efforts to implement wage reductions. If this was the case, then the order would have played an important role in depressing the rate of profit and curbing the process of capital accumulation; the social cost of labour would have been relatively high, compared to the Laurier boom years of the twentieth century, and

The Working Class and Industrial Capitalist Development 147 the process of appropriation curtailed. Breaking the back of the intransigent Knights would have become a political, social, and economic imperative for an industrial capitalism moving away from the stage of anarchic competition toward monopoly. Monopoly required heightened forms of integration (both in terms of the corporate form and the increasingly complex relations of finance and industrial capital), an assault on all resistance, passive and active, at the workplace—where rationalization, efficiency, welfare schemes, refined systems of piece/bonus payments, and the open-shop drive were the hallmarks of class relations—and the degradation of labour.10 There is nevertheless no mistaking the tremendous expansion in the manufacturing sector in this late nineteenth-century period. We see the impressive quantitative gains in workers employed in manufacturing; the regional context of Ontario's economic history (the dominance of Toronto and Hamilton and the underdeveloped but nevertheless significant economic activity along the St. Lawrence and Ottawa rivers); and the manufacturing importance of various small towns. More than 50 percent of manufacture in the 1880s was located in Canadian communities with populations under lOjOOO.11 The regional economy of Ontario was a far from homogenous entity, however, even as late as the 1880s. The closing years of the nineteenth century were something of a struggle for industrial hegemony, in which the small manufacturing unit servicing a local market gave way to the larger productive concern, often contributing toward the decline of the small town and a shift in the location of industry to the population centre of a larger city. Thus, the value added in all manufacturing activity in York County (Toronto) rose from 27.44 percent in 1870 to 32 percent in 1890. Toronto and Hamilton each accounted for 20 percent of industrial employment in southern Ontario in 1881, although they contained only 6.5 percent of the region's population. Even given this increasing specialization, localization, and gross expansion in the manufacturing sector, however, the 1880s were a decade of contrasts: handicraft forms of production still coexisted with thoroughly mechanized processes; the large factory was still the exception rather than the rule.12 In Ontario's iron and steel industry, for instance, a small group of large firms—rolling mills, smelting furnaces, machine shops, and agricultural implements works—were overshadowed numerically by the ubiquitous blacksmith's establishment, of which there were 9,423 in 1890. Even in the fairly advanced sector of agricultural implements production, Ontario possessed 141 factories with an average employment of only twenty-three workers per plant. There were thus more factories manufacturing agricultural machinery in the province than there were in the entire United States, where the rise of International Harvester in these years revealed the drift toward oligopoly. In general, the size of manufacturing units in Ontario in 1881 remained quite small, with fewer than five workers per concern. As Spelt has shown, of twenty-seven of the most important industries on the basis of employment, a mere eight averaged more

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than ten workers per shop. Only cotton mills, with 160 workers per unit, and locomotive workers, averaging 135 hands in each establishment, were of factory size. Foundries (brass, iron, lead, and machinery), tobacco works, hosiery mills, printing offices, and agricultural implements shops all employed, on an average, between fourteen and twenty-three workers, although specific firms were certainly far larger.13 Moreover, the mixed nature of the economy was revealed in the energy sources utilized by Ontario manufacturers throughout the period. The trend was definitely toward the increasing use of steam power, which by the 1880s was all but dominant in boot and shoe production, and the railway and iron works. Coal, rather than wood, was increasingly used to supply the heat, rather than wood. Still, as late as 1901 the census stated that steam supplied only 60 percent of total mechanical power used in the province's manufacturing, an indication that in some sectors—especially in textiles, pulp and paper, and flour and grist mills—water power retained some importance. Finally, in the lumbering industry, and in the production of lumber products such as shingles, timber refuse was often used to produce the steam heat, thus avoiding dependence on imported coal. Ontario's 1880s, then, experienced industrial development, but in limited ways: there remained specific barriers to overcome, and significant distances to travel, before a mature industrial capitalism, in its monopoly phase, would consolidate in the province.14

Uneven Development How did this process of advancing but uneven development stamp itself upon the character of specific Ontario locales, where the Knights of Labor would come to prominence in the later years of the nineteenth century? As we have already seen, the industrial cities of Toronto and Hamilton led the way. We have commented on the experience of these major centres in other works and will restrict ourselves here to a mere overview.15 In the case of Toronto, the local economy was paced by the rapid growth of the clothing industry, which was capturing a growing share of the south-central Canadian market in the years 1870-1890. As the largest single centre in the province, Toronto understandably led in the production of shoes, dresses, corsets, men's clothing, and fur goods; in shirt manufacture it ranked second. Dominated by small shops dependent upon local sales, the clothing industry could also give rise to firms like the Crompton Corset Company, which as early as 1881 employed 350 persons and gained a share of the national market. Secondary wood products were also important, as was publishing and printing. In the latter, York County's share of the total Ontario-Quebec output rose from 28.45 percent in 1870 to 41.9 percent in 1890. In a relatively insignificant sector, chemicals, we glimpse the increasingly important role of Toronto as a marketing centre: 5.46 percent of the industry was located in York County in 1870; by 1890 this had increased

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to almost one-quarter. Toronto also housed perhaps the most diverse assortment of iron industries of any Ontario city. Several small shops and factories engaged in specialized, precision-production manufacture, turning out scales, printers' type, and instruments; larger works tended to concentrate on agricultural implements, iron castings and machines, and engines. Massey's, which by 1881 employed 200 workers and was served by two private railway sidings connected to the downtown yards, dominated this productive sphere. Hamilton was perhaps Toronto's most significant rival in this iron and steel sector, and the lack of technological innovation in this sphere in the period allowed the smaller city to retain much of its specialized strength in particular traditional realms of primary iron and steel production and metal fabrication. The Hamilton Rolling Mill Company was southern Ontario's only large producer of primary shapes, and the city also led the province in the production of assorted machinery, iron castings, and sewing machines. As headquarters of the Great Western Railway (GWR), Hamilton in 1881 had attained a unique provincial advantage, and one that greatly stimulated production of locomotives, axles, wheels, and the structural components of railway bridges. The city was also well known as a centre of the stove industry, and Hamilton's founders would play a crucial rule in uniting their peers across the province in opposition to what they viewed as the pernicious rules and restrictions of output of the Molders' Union. In 1880 iron and steel products accounted for 30.16 percent of all value added by manufacturing in the county of Wentworth. Beyond the boundaries of these reasonably well-studied industrial cities lies a virtual no-man's land, where our knowledge of economic activity is severely restricted. And yet it is clear that in countless Ontario communities capitalist development touched the lives of many workers and employers. Linked closely to this process was the importance of railways, which served as a connecting link, integrating a developing home market. The transportation revolution of the mid-to-late nineteenth century was perhaps the key element in the shifting location and expansion of manufacturing in these years from 1870-90.16 Most of the railways built in southern Ontario after 1881 radiated out from Toronto, further contributing to that city's metropolitan dominance. Eastern Ontario experienced significant railway expansion in the 1880s, a line being constructed from Toronto to Montreal via Peterborough; rail communications were established between Kingston, Belleville, Napanee, and Trenton. Points to the north were also drawn into the connective grid, and Smiths Falls became an eastern divisional point of the Canadian Pacific Railway (CPR) in 1885. But more significant, perhaps, was the rising importance of the old established lines in western Ontario—the Grand Trunk Railway (GTR), Great Western, and Canada Southern—which received great stimulus as the CPR and GTR battled for control of the country's rail lines. In this struggle for hegemony local traffic was actively sought, mileage was expanded, and efforts

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were made to capture a greater share of the American through traffic. Centres such as St. Thomas and Stratford became links in a chain of economic development, and their wage-earning class was often tied directly to the shops that served the railways or the rail systems themselves. As one Stratford machinist noted in 1890, "the rise and fall of this city depends upon the Grand Trunk/' and indeed it did, for the GTR shops employed some 700 workers, many of them highly skilled. In Elgin East (St. Thomas), for instance, there were two car and locomotive works in 1881, employing 158 hands; by 1891 two establishments designated as producers of rolling stock employed 378 male workers. The city had in fact grown rapidly in the 1870s, being transformed from a modest preindustrial service town to a dynamic railway centre linked to the major Ontario metropolitan markets. Major shops of the American-owned Canada Southern Railway located there, employing abut 700 workers by the mid-1880s, and the GWR established a repair shop in the city. By 1885 the New York Central had also commenced similar operations. Because of this rapid growth the city's class boundaries were rigid and geographically specific: the town was divided into quadrants by the various rail lines and the workers lived in the eastern sections.1^ The railways, through declining freight rates and economies of scale, helped to concentrate economic activity in a number of diversified manufacturing centres, whose growth took place at the expense of the smaller towns where factories were insufficiently developed, compared to their larger, bettersituated rivals, to capitalize on transportation costs. London was just such a place. Its strength seemed to reside disproportionately in the food-processing sector, with concentrations of capital in bakeries, breweries, and tobaccorelated works. On the eve of the 1880s it had "gained a nationwide reputation as a five-cent cigar manufacturing centre," while Toronto and London, with fourteen of the province's eighty-two breweries, produced well over 50 percent of all the beer by value in southern Ontario. Here the level of production was most decidedly limited by the extent of the market, for brewers had to rely on natural ice to cool their product, which in a prerefrigeration age could not be shipped any great distance. Nevertheless, both Labatt's and Carling's managed to corner an ever-growing share of the Ontario market, which led the latter to expand into the United States in the late 1870s and to Ottawa, Hamilton, and Montreal in the 1880s.18 Middlesex county produced tobacco goods accounting for 10.07 percent of the total value added in this sector in Ontario and Quebec in 1880, trailing only Montreal (48.42 percent) and Toronto (17.39 percent). Foods and beverages in the secondary manufacturing sphere, meanwhile, contributed 12.47 percent of the total value added by manufacturing in the county in 1880, and 12.99 percent in 1890. But the city also gained prominence as a marketing and distributing centre for the dairy belt of western Ontario's Middlesex, Oxford, Elgin, Lambton, Perth, and Huron counties. In the textile sphere, the city's garment industry grew on the basis of its prox-

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imity to the Niagara Peninsula's cotton mills. Finally, in the wood-processing sector, concerns like the London Furniture Company employed 150 men, while in metal fabricating the city's McClary Manufacturing Company, Ontario Car Works, and E. Leonard & Sons produced stoves, engines, and other goods. These latter firms employed between 80 and 450 hands throughout the decade of the 1880s. Although clearly operating in the shadow of similar businesses in Toronto and Hamilton, such London establishments all benefitted from access to trunk railway lines and could penetrate distant market cheaply.19 Other western Ontario towns also exhibited indications of the importance of industrial activity. Brantford's economic place in late nineteenthcentury Ontario was dominated by the Harris (1871), Wisner, and Cockshutt (1877) agricultural implements companies, and a hosiery factory. Harris & Son, taken together with the Massey works of Toronto (and with which it would merge in 1891), accounted for 60 percent of all agricultural implement sales in the Dominion by the mid-1880s. No doubt the presence of this firm explains the impressive place of iron and steel products in Brant county's figures of value added by manufacturing: 30.89 percent in 1880; 35.29 percent in 1890. Guelph, Gait, Berlin, Hespeler, and even Collingwood to the north all housed similar, if much smaller, manufacturing concerns, producing for local, even regional, markets. Small meat packers and distilleries were among these, as were modestly sized woollen mills, concentrated in Waterloo county, employing an average of thirteen workers each and driven by water power. Small-scale metal fabricating shops, with their origins in blacksmithing, and often devoted to the production of ploughs and other agricultural implements, located readily in western Ontario, attracted by the easy access to both the national and local markets. The largest plough manufacturer in the country was, for a time, located in Exeter, north of London, while Ingersoll (1856), Paris (1864), and Sarnia were other such sites. The latter two towns, in particular, were designated "town tariff" points in 1874, and thus received low competitive railway rates that put them in a position of advantage over other locales where standard mileage prevailed. Foundries dominated the economy of Gait, a town known as "the Manchester of Canada," and three iron-working establishments were functioning as early as 1857. In Guelph a hosiery factory employing over 100 workers, the Raymond Sewing Machine Company (160 employees), the Guelph Sewing Machine Company, and the Crowe Iron Works dominated the industrial landscape. In addition, the Bell Piano and Organ Company employed over 100 hands and shipped its products throughout the British Empire. Berlin, a centre of German immigrants, was well known for its button, garment, and furniture industries.20 In the Niagara Peninsula St. Catharines had taken advantage of the building of the Welland Canal in the 1820s and 1830s to displace Niagara as the major urban centre. St. Catharines enjoyed a mixed industrial base with foundries, shipbuilding, axe making, and the production of wheels providing

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the foundation of local economic life. Other industrial towns also developed along the canal, taking advantage of its water and water power. Chippewa had one of the largest foundries in the country in the years after mid-century, while Beamsville was the location of the important Gibson quarries, which employed larger numbers of skilled stonecutters whose product was shipped throughout Ontario. Thorold and Merritton both contained major cotton mills. The latter town was the site of the Lybster Cotton Company, the oldest mill in Ontario, established in 1860 with Toronto capital.21 By 1879 it was said to be running at its "fullest capacity in order to supply the demand . . . and to keep up with . . . contracts." With an average of approximately 160 employees per mill, the cotton textile industry was an early case of unambiguously large-scale factory production, demanding access to a sufficient supply of labour (see Table 3). It was claimed in 1885 that thirteen of the seventeen mills in the province had been started after 1878, that employment had increased 210 percent, and that wages had risen from $202.79 annually to $210.28 22 Table 3: Cotton mills in Ontario, 1883-92 1883

Name of mill Canada (1872) Stormount (1879) Kingston Dundas(1862) Hamilton (1882) Ontario (1882) Lybster (1862) Thorold Craven (1880) Merriton (1884) Cornwall (1885)

Location Cornwall Cornwall Kingston Dundas Hamilton Hamilton Meriton Thorold Brantford Meriton Cornwall

1892

No.

No.

No.

No.

Looms 1,000 550 300 450 250 250 300 300 300

Spindles 45,000 26,000 14,000 20,500 12,000 11,500 14,000 14,000 14,000

Looms 812 650 300 508 65 362 260 — 270 248 n.k.

Spindles 50,000 27,000 11,000 16,300 6,000 12,000 12,000 — 10,000 12,000 n.k.

Source: (1883) Dominion Annual Register and Review, 1883 346; (1892) Monetary Times (9 Sept. 1892): 277-9. (Our thanks to Peter DeLottinville.) Further to the north and to the east industrial production was less well established, particularly in the area of secondary manufacturing. By the 1880s the Ottawa-Hull and Muskoka regions had secured hegemony over the production of wood products, and a number of mills were engaged in the preparation of sawn lumber, shingles, and matches. In 1881 over 800 adults and 64 children worked in Muskoka's seventy-four mills, earning yearly about $775,000. One

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local historian in the 1930s recorded that in the 1880s "the shantyman was king" and that mills dominated the economy of Owen Sound, Collingwood, Penetanguishene, Parry Sound, Midland, Sturgeon Bay, and Waubashene.23 Refining and processing the wood products of this region probably spilled over into southern towns like Lindsay and Uxbridge, where a number of sawmills were located. The dominance of lumber was even more pronounced in the Ottawa valley, where the five largest producers in Canada had congregated by 1874. Over 2,500 men were employed in the production of lumber in 1891 in the city of Ottawa alone, and the industry found market outlets in both Britain and the United States. Primary wood products accounted for 30.03 percent of all value added by manufacturing in Carleton county in 1880, while secondary wood products contributed a further 3.63 percent. East of Toronto, along the St. Lawrence River and Lake Ontario, smallscale processing industries and metal fabricating plants attempted to capture a share of a largely local market. Small centres like Trenton and Deseronto clung desperately to their earlier status as major sawmilling and lumber-exporting points, but by the 1880s the heyday of the old timber trade had passed, and with it their prominence. In the larger regional towns, however, there was room for some consolidation. Gananoque ("the Birmingham of Eastern Ontario"),24 Brockville, Smiths Falls, Oshawa, and Kingston all had the ubiquitous foundries, machine shops, and agricultural implements works of the period. G.M. Cossitt & Brothers and Frost & Wood Company established significant agricultural-implements factories in Smiths Falls, the latter company employing over 150 skilled hands, producing goods valued at $150,000 designed for the farms of Canada, Australia, and South Africa. Kingston's large locomotive works employed over 350 workers throughout the early 1880s, and a cotton mill with approximately 200 hands opened in 1882. In the southern sections of Ontario county, Oshawa-Cedardale was dominated by the Joseph Hall Works. Concentrating on the production of threshing machines, mowers, and ploughs for the Canadian market, the works employed 250 men as early as 1867. By the 1880s other important shops had long-established histories: the McLaughlin carriage works, Masson's seed-drill plant, A.S. Whitting Agricultural Implements, Oshawa Stove Company, W.T. Dingle's Farming Mills and Seeders, and the Robson & Lauchland Tanneries. The area's six agriculturalimplement producers employed 405 hands in 1881, creating products valued at $602,500.25 But the most dramatic expression of industrial growth in eastern Ontario was Cornwall's cotton mills. Here was one city where the National Policy tariff of 30-35 percent was never challenged. In 1876 Cornwall's Canada Company Cotton mills were the largest in the nation, the value of the plant hovering near the half million dollar mark, the annual product valued at $400,000. Approximately 350 workers (100 males and 250 females) toiled over 20,000 spindles to earn yearly wages of $75,000. American competition, in the midst

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of the poor economic conditions of the mid-1870s, was severe, and the company had been forced to implement a series of price cuts. The Americans had many advantages, not the least of which was that, in the words of the mill manager, "they get more work out of their help than we do, and they have more of it. We have to get extra labour in order to control our help and supply the places of those who are sick or who choose to remain away." "I am getting every pound of it that the machinery was calculated to take out of it," he later replied to one enquiry about the possibility of increasing output. Five years later, protected by the newly revised tariff and stimulated by the return to prosperity, Cornwall's three cotton mills—one was a relatively small firm— employed 133 men, 277 women, 186 boys, and 190 girls. Their yearly wages totalled $179,800 and $456,000 worth of material was used to produce cotton goods and cloth valued at $883,000. By the time another half-decade had passed, Cornwall's two major textile producers—the Canada Company and the Stormont—had made impressive expansionary strides. In 1887, for instance, the Canada Company mills had doubled the number of hands employed in 1876, hiring approximately 700 workers, and wages had increased two-anda-half times, to $208,000 yearly. (Per capita yearly wages had apparently increased significantly: 1876 [$214]; 1883 [$282]; 1884 [$263]; 1885 [$277]; 1886 [$290]; 1887 [$298].) At the Stormont mills there were 288 women and 262 men employed, meaning that over 1,200 workers laboured in these two large mills in 1887. Small wonder that textile products produced 67.12 percent of the value added by manufacturing in Stormont country in 1880 and 58.57 percent in 1890. Even the small woollen mills of Cornwall, each employing an average of 43 workers, were nine times larger than the provincial average, set by the backwoods of mills of Lanark county, where 869 workers eked out a living in the sixty-five water-powered mills under technically backward, capital-starved conditions. Textiles dominated Cornwall more thoroughly, perhaps, than any other industry in any other Ontario town or city, and 47 percent of all cottonmill workers in the province in 1881 worked in the town's mills, creating a product destined for the Montreal garment industry.26

The Working Class Across the province, then, in spite of the increasing dominance of Toronto and Hamilton, of under development, uneven growth, and reliance upon primary production of the old timber staple in some areas, capitalist production was a force to reckon with by the 1880s. It transformed social and productive relations in the large cities as well as in the tiny rural hamlets. In this changed context class came to the fore as a clearly perceived reality; a culture premised upon this historic relationship of antagonism emerged more forcefully than it had in the past, and old distinctions appeared to fade in the face of a common experience and a recognition of the unity of life and work within a generalized

The Working Class and Industrial Capitalist Development 155 system of appropriation. Railroads began the process of integrating a large regional unit, and linked the province to national if not international markets. Town and country increasingly found themselves enmeshed in a setting in which their pronounced differences began to pale before significant similarities. Social costs were many and varied, from the growing impersonalization of the wage relationship to the sooty environment of iron-and-steel-dominated Hamilton to the stark landscape of the milltown. Workers, of course, did not passively accept such developments, which had necessarily been part of a protracted process, and years well before the 1880s witnessed the first stirrings of Ontario's working-class movement. But to appreciate fully the extent to which the Knights of Labor represented a dramatic upsurge of Ontario workers in the 1880s—a confluence of class and culture—it is necessary to comment briefly on the state of labour organization, labour-capital relations, and the character of working-class culture before the coming of the Order. Prior to the appearance of the Knights, Ontario workers possessed a long history of resistance, challenge, and organization that reached back to the opening decade of the century. As early as 1815 Captain O. Edward, commodore of the colony's navy, complained to his superiors of the "vile and disorderly conduct" of the shipwrights sent out from England to labour in the Kingston dockyards. Unions were formed in Upper Canada as early as 1827, with Hamilton and York (Toronto) being centres of printers', foundryworkers', and building trades workers' organizations. The Irish led a series of violent and spontaneous strikes and work stoppages on the canals throughout the 1830s and 1840s. Work discipline—in the ports, ships, and fields of the commercially capitalistic but nevertheless largely agrarian society—was persistently opposed, by all range and manner of workingmen and women. A criminal subculture, often linked to the labouring poor through a complex network of family, neighbourhood, work place, or prepolitical class grievance or resentment, drew out the more stridently political force of the law, which proved a cornerstone of Tory ideology and practice in these early years. Thus, popular retribution—in the instance of an arsonist's night time revenge—and political insurrection during the rebellion of 1837-8 united Tory factions in demonstration of "the majesty of the law," which required some "terrible examples" to check any instance of plebian resistance to authority. The restraints upon workers' organizations established in the conspiracy laws, as well as public executions, were proof enough that "justice dare[d] array herself in terrors when it [was] deemed necessary."27 All of this, and much, much more, indicates that Ontario workers were not just passive victims in the hands of Upper Canada's Tory rulers. But such diverse, fragmented, and localized reactions to domination also hinted at the limitations of this experience. For, prior to 1850, Ontario's producing classes had little conception of unity, little awareness of their place in a class society, as a class. Rather, they were part of a broad amalgam of useful

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producers that the ruling elite regarded as a horizontal sort of beast, and a dangerous one at that. Inside that beast, however, among the producers themselves, the animal was carved up into discrete entities: the rough and the respectable; the Irish and the Scots; the printers and the carpenters; the apprentices, journeymen, and masters. Each of these diverse sectoral interests saw themselves as a group apart, not only from the ruling elite, but from each other. Even among specific groups distinctions could be drawn: among the Irish Catholics, Munster and Connaught battled for jobs; shoemakers from York, Kingston, or Toronto identified with their locale rather than their trade. Such specific identifications were a denial of the unifying effect of group culture, and particular strata thus reacted to the more coherent (if also fragmented and division-ridden) rule of the elite in many ways: by mockery, by deference, by evasion, or by violent or reasoned opposition. Much of this is speculative. But what seems reasonably clear is that the producing classes posed a threat (and early forms of class conflict were a part of this) to the ruling elite at the same time that they were essentially impotent. Such a conception of the early history of Ontario workers raises many interpretive questions, not the least of which are those that revolve around the issues of culture and hegemony. Put simply, we are arguing that the culture of the producing classes, in this period, was a culture that was understandably inhibited in its capacity to resist. If culture can be at all related to the process of opposition, it must be a culture that is embedded within specific productive relations and forms of appropriation that are common, that are perceived as common, and that are, finally, understood as antagonistic, pitting class against class. Because the commercial capitalism of early Ontario had not yet generated this kind of experience, a culture capable of welding early workers together against the dominant class was thus not a possibility. Instead, forms of paternalism mediated class antagonisms, the upwardly mobile artisan defied any notion of a rigidly established class structure, and the rough and the respectable parted company in the kinds of work they did, the character of their family life, and the ways in which they spent their leisure hours. Lower-class behaviour, as a whole, seemed dramatically cut off from the established culture of many local elites at the same time that it remained and operated on the turf of those privileged groups. In terms employed recently by G. Sider in an analysis of the Newfoundland village fisheries, the producing classes of Upper Canada lacked class consciousness and an alternative hegemony, but they did generate a series of counter-hegemonic cultural forms, an arsenal of symbols, rituals, customs, traditions, and practices that expressed experiences and claims different from those of the elite. The basic limitation of such counter-hegemonic practices lay, not in the use of borrowed symbols and customary behaviour, but in the fragmented character of social relations in the political economy of Upper Canada.28

The Working Class and Industrial Capitalist Development 157 This began to change in the 1840s and 1850s, as the increasing sway of capital transformed social, economic, and cultural relations. As we have already noted, the first Canadian railway boom of the early 1850s went far toward producing an integrated home market, the first large-scale mechanized manufactories, and a bourgeois commitment to a strategy of industrial development for the Canadas. Such happenings had noticeable repercussions in the realm of social relations, culminating in the first sustained wave of economistic working-class resistance, what contemporaries referred to as "an insurrection of labour." To be sure, there were many hangovers from an earlier period, in both the form and the content of the class confrontations of the 1850s and in the culture of the working people. No doubt many customary forms of behaviour remained, and certainly many of the characteristic divisions retained significance, notably in the distinction between skilled and unskilled. But there were also signs of change. Rather than fragmentation, the 1853-4 upheaval hinted at the beginnings of class consolidation and the possibility of a wider cultural unity among workers. Across the province diverse trade groupings faced similar situations and a common context: they were drawn into a general "wages movement" that saw at least forty strikes involving bricklayers, tailors, shoemakers, printers, bakers, tinsmiths, stonecutters, and masons. Occasionally labourers participated in these battles, although the unskilled waged their job actions in the depressed years after 1855, when navvies led a series of work stoppages on the railways, protesting contractors' failures to meet their payroll obligations. The Irish, once isolated on the margins of working-class life, were now better integrated into this newly developing culture of resistance. We know so little about the cultural realm—leisure activities, pub life, family and kinship, and so forth—that it would be foolhardy to speculate recklessly here. Our major point is that an experience that had turned solely on a diverse and often contradictory set of counter-hegemonic cultural forms in the pre-1850 period now encompassed the beginnings, however primitive and incomplete, of what we can readily recognize as a working class pitted against an employing and owning class. While we can speak most emphatically of cultures in the years prior to mid-century, the 1850s thus see the initial stages of the breakdown of those pluralities and a movement toward limited forms that hint at the impact of developing social relations of production, in which the common, rather than the fragmented, features of work and everyday life assumed great importance.29 This process continued throughout the 1860s and 1870s and was revealed in the institutional development of the international craft union. Until 1853 most if not all Canadian unions were largely local affairs. Shoemakers' unions were established in Toronto and Hamilton in 1858, but quickly disappeared, and the actual beginnings of North American unions in Ontario dates from 1859. Led by the moulders, who established locals in Toronto, Hamilton, London, and Brantford, trade unions expanded quickly throughout the 1860s: rail-

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way workers, printers, shoemakers, carpenters and joiners, coopers, machinists and blacksmiths, bricklayers, and cigarmakers also all had Ontario-based trade organizations. The Knights of St. Crispin established at least nineteen lodges in the province in the late 1860s and early 1870s. In 1903, when the Labour Gazette studied the origins of contemporary trade unions in the province it found that one was formed in the 1840s, three in the 1850s, thirteen in the 1860s, and eighteen in the economically depressed years of the 1870s. Moreover, the emergence of such unions was often followed by the establishment of city-based trades assemblies or councils: Hamilton (1863), Toronto (1871), Ottawa (1872), and St. Catharines (1875) all had such bodies.30 Such institutional development reflected the increasing presence of class, testifying to the significance of a defensive posture in the face of employers' persistent efforts to appropriate an increasing share of the product of labour. This led, as well, to the union effort to control production, as firm lines were drawn beyond which capital could not go if it wished to maintain output and reasonably cordial relations with skilled workers possessing a well-developed sense of what was just and fair. Thus the rise of the trade union was more than a mere economistic development, and it contributed to a world-view that set worker against boss, producer against monopolist, and labour against capital.31 To see the union, then, through the lens of J.R. Commons, as a mere marketplace phenomenon, would be to misinterpret a crucial development. As D. Montgomery has noted in another context, a culture does not float on air, and the emergence of the union is a central moment in the historical evolution of the working class and its culture.32 To divorce the union from such aspects of everyday life as the family and leisure, on the grounds that one is an economistic and institutional development, the other a facet of culture, is folly. Our contention, then, is that the mid-period of the nineteenth century (1850-1880) saw the beginnings of a transformation in the character of class and culture. As industrial capital established the material forces of production along lines that we associate with modern industry, class became a recognizable reality for Ontario workers. This historical development conditioned a cultural consolidation, as the counter-hegemonic forms of the pre-1850 years inched toward a limited, but discernible alternative hegemony built around more sustained and broadly based moments of resistance and class institutions. The process never ran its course, and was held back by many of the same inhibitions that had divided the producing classes of the earlier period. Divisions between skilled and unskilled, local attachments, links to intermediate strata (small owners, merchants, petty producers), and the astute efforts of segments of the bourgeoisie to accommodate the insurgent working class ensured that this class remained a weakened voice of opposition. In the cultural realm, understandably, these are years in which two ways of life are pitted against each other at the same time that they were mediated by nonclass-based alignments.

The Working Class and Industrial Capitalist Development 159 The family may have been one such realm, although we know too little about it to speculate with any degree of assuredness. Associational life, certainly, was part of the process, as fire companies, sporting associations, friendly societies, and institutions of self-help drew workers to their activities. Such nurseries of the industrious classes were often, although not always, dominated by pillars of the community; yet they were also susceptible to being turned to working-class purpose. Domination did not necessarily culminate in the total control of the life of the labourer. And so this period, in terms of class and culture, stands as one of essential ambivalence, in which class is emerging and culture consolidating, but all within the context of limitation. The growth of trade unions in these years was part of this, and by 1880 Canada as a whole possessed fiftythree international unions and a number of purely local or provincial bodies. Ontario had the majority of such organizations.33 The strengths as well as the weaknesses of this transition period were revealed starkly in 1872, as Ontario workers mounted an unprecedented struggle to secure the nine-hour day. As a major confrontation that raised to social prominence all the contradictions of the social relations of the time, the events of 1872 indicated how far along the road of antagonism labour and capital had proceeded. Yet, for all the clarity with which such contradictory class relations were posed the struggle for a shorter working day succumbed to the class manipulations of Sir J.A. Macdonald and his Tory supporters. In the end, it was Tory hegemony, rather than working-class autonomy, solidarity, and alternative, that emerged the victor. The Nine-Hour leagues, the Canadian Labor Union, the massive involvement of many ranks of skilled workers in a struggle for common betterment all collapsed as the economy dipped into a major depression and workers' interests were subordinated to the political machinations of an elite. By 1879 it appeared that there was little in the way of class opposition to the rising Canadian bourgeoisie, snuggling up to the national interest with its policy of transcontinental railways, industrial development, and settlement of the West. An alternative hegemony, one that had appeared as a possibility in 1872, seemed nowhere to be seen.34 But class and cultural forces that have been silenced or are in retreat are not always without meaning, nor are they incapable of being put to use in a new context. The 1880s would witness essential changes, as a working class arrived on the scene, forcefully and unambiguously, for the first time. This class, which had been more than fifty years in the making, and had at its back a culture of ambiguity and diversity, became unmistakably entwined with the rise of the Knights of Labor, a body which took the ambivalence of the past cultural context of working-class life and forced it into a movement culture of opposition. In the expanding economic context of the 1880s Ontario workers made strides towards unifying their lives as productive men and women and their lives as citizens, family members, neighbours, and advocates of change. A whole series of cultural expressions thus linked up with a class content, and the

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fragmented and sectional concerns gave way to broader demands that encompassed fundamental challenges to the established order of capitalist society. In whatever area one wants to consider—economic, social, political, cultural—the Noble and Holy Order of the Knights of Labor voiced the need to go beyond the existing social relations of production. An alternative hegemony was finally on the agenda, finally in the process of formation. The significance of the 1880s, as this moment of reaching out, was further confirmed by the gains in organization among workers not necessarily affiliated with the Knights, an expansion in the ranks of organized labour that nevertheless linked up with the Order in many trades and Locals. These years, for instance, saw tremendous growth in unions, and by 1890 Ontario led all of Canada with 146 locals in thirty-five centres. Of the 430 unions in the province in 1903, 54 were formed in the 1880s.35 One of the leading international unions of the decade was the Iron Molders' International Union (IMIU), which built upon the foundations of the 1850s, 1860s, and 1870s to sustain strong locals in Hamilton (No. 26) and Toronto (No. 28) and, after 1887, an Ontario-wide district organization. The relationship between the IMIU and the Knights cannot be plotted with mathematical certainty, but in Brantford (Standard LA 3811), Hamilton (Library LA 1864), Kingston (Prontenac LA 10539), and Oshawa (Tylors LA 4279) there existed trade assemblies identified as locals of moulders. In addition, we know from scattered sources that Toronto (Maple Leaf LA 2622), Brockville (Franklin LA 2311), Smiths Falls (LA 6722), Lindsay (LA 5402), and Oshawa (Aetna LA 2355 and LA 4428) all contained moulders and other metal workers as well. Finally we have considerable reason to suspect that Cobourg (LA 2598), Toronto (LA 5254 and LA 5650), Woodstock (LA 3151 and LA 4992), Gait (LA 6112), and Peterborough (LA 6952) might also have had moulder members. The lines between the craft unions and the Knights of Labor were thus never drawn as sharply in reality as they have been by historians subsequently, at least not in the Ontario of the 1880s.36 In the history of Canadian labour, then, the 1880s are an extremely important moment,37 marked by significant expansions in the unionized sector. But this growth, however significant, did not occur in a vacuum, and paled in comparison, quantitatively and qualitatively, to the rise of the Knights of Labor. We will delineate the contours of this remarkable labour upsurge, and plot the Ontario dimensions of what is often referred to in American historiography as the Great Upheaval.

Notes [1] V.I. Lenin, The Development of Capitalism in Russia (Moscow, 1964), 595, 599.

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[2] The literature on the staples thesis is now voluminous. But see D. Creighton, H.A. Innis (Toronto, 1957); R.F. Neill, A New Theory of Value: The Canadian Economics of H.A. Innis (Toronto, 1976); the special Innis issue of The Journal of Canadian Studies (Winter 1977) 12; and C. Berger, The Writing of Canadian History (Toronto, 1976), 85111, 187-207, which also contains some commentary on Mackintosh. Works exemplifying the left-nationalist approach include D. Drache, "Rediscovering Canadian Political Economy," Journal of Canadian Studies (1976) 11:3-18; I. Parker, "Innis, Marx and Canadian Political Economy," Queen's Quarterly (1977) 84:545-63; R.T. Naylor, "The Rise and Fall of the Third Commercial Empire of the St. Lawrence," in G. Teeple, ed., Capitalism and the National Question in Canada (Toronto, 1972), 1-41; R.T. Naylor, The History of Canadian Business, 2 vols. (Toronto, 1975); G.S. Williams, "The Political Economy of Canadian Manufactured Exports: The Problem, Its Origin, and the Development of Trade and Commerce, 1885-1920," (Ph.D. thesis, York University, 1978). This interpretation, denigrating the force of nineteenth-century industrial capitalism through stress on the hegemony of commercial capital and the persistence of colonial relations vis-a-vis Britain and the United States is criticized in L.R. MacDonald, "Merchants Against Industry: An Idea and Its Origins," Canadian Historical Review (1975) 56:263-81; and in B. Moore, "Staples and the Capitalist Mode of Production: A Study of Mining in Canada, 1845-1920" (M.A. thesis, McMaster University, 1978), but it continues to permeate much recent writing. See, for instance, W. Clement, Continental Corporate Power: Economic Linkages between Canada and the United States (Toronto, 1977); and J. Smucker, Industrialization in Canada (Scarborough, 1980). [3] G. Myers, A History of Canadian Wealth (Toronto, 1972); H.C. Pentland, "The Development of a Capitalistic Labour Market in Canada," Canadian Journal of Economics and Political Science (1959) 25:45061; Pentland, "Labour and the Development of Industrial Capitalism in Canada" (Ph.D. thesis, University of Toronto, 1960); S.B. Ryerson, Unequal Union: Roots of Crisis in the Canadas 1815-1873 (Toronto, 1973); G.W. Bertram, "Historical Statistics on Growth and Structure of Manufacturing in Canada, 1870-1957," in J. Henripin and A. Asimakoupulos, eds., C.P.S.A. Conference on Statistics, 1962 and 1963 (Toronto, 1964), 93-146; B.D. Palmer, A Culture in Conflict: Skilled Workers and Industrial Capitalism in Hamilton, Ontario, 1860-1914 (Montreal, 1979), 3-31; and G.S. Kealey, Toronto Workers Respond to Industrial Capitalism 1867-1892 (Toronto, 1980), 1-34. [4] People's Journal, cited in S. Langdon, The Emergence of the Canadian Working Class Movement (Toronto, 1975), 3; and Journal of the Board

162 [5]

[6] [7] [8]

[9]

G.S. Kealey, B.D. Palmer of Arts and Manufacturers for Upper Canada (1867) 7:220. Bertram, "Historical Statistics," 93-146; W. Bland, 'The Location of Manufacturing in Southern Ontario in 1881," Ontario Geography (1974) 8:8-39; T.W. Acheson, "The Social Origins of the Canadian Industrial Elite, 1880-85," in D.S. Macmillan, ed., Canadian Business History: Selected Studies 1947-1971 (Toronto, 1972), 144; and P. Warrian, "The Challenge of the One Big Union Movement in Canada, 1919-1921" (M.A. thesis, University of Waterloo, 1971), 11. H.B. Small, The Products and Manufactures of the New Dominion (Ottawa, 1868), 136, 152. W.W. Johnson, Sketches of the Late Depression (Montreal, 1882), preface and passim. See, for instance, T. Copp, The Anatomy of Poverty: The Condition of the Working Class in Montreal, 1897-1929 (Toronto, 1974); M.J. Piva, The Condition of the Working Class in Toronto—1900-1921 (Ottawa, 1979); and D. Millar, "Study of Real Wages: The Construction, Use and Accuracy Check of a Constant-Dollar Plotter," (unpublished research paper, 1980). J. Ferland, "The Problem of Change in the Rate of Surplus Value Studied through the Evolution of the 'Social Cost of Labour' in Canada 18701910," (M.A. thesis, McGill University, 1981). Cf., M. Nicolaus, "Foreword," in K. Marx, Grundrisse: Foundations of the Critique of Political Economy (Rough Draft) (Harmondsworth, 1973), 48 (and text, 287): "The immediate inverse identity of profits and wages holds only in the short run, and only if the intensity of exploitation (for example speed of production) is held constant. Over the somewhat longer term, specifically during the upward phase of the economic cycle, however, both wages and profits may show an absolute increase at the same time; and during such periods the worker may either take the risk of accumulating a small fund of savings for the next crisis, or may broaden the sphere of his consumption to take a small part in higher, even cultural satisfactions, . . . [for instance] agitation for his own interests, newspaper subscriptions, attending lectures, educating his children, developing his taste etc., constituting the workers only share of civilization which distinguishes him from the slave." Regardless of whether the high social cost of labour was a product of organization, or whether organization was a fruit of economic prosperity, Nicolaus correctly pointed to the notes in the Grundrisse as providing an important theoretical foundation for the discussion of the relevance of

The Working Class and Industrial Capitalist Development 163

[10]

[11] [12]

[13]

[14] [15]

[16] [17]

labour unions and movements (49). Our reading of the 1880s in North America suggests strongly that it was in this period of economic upsurge that labour did indeed take agitational steps of great importance. For a valuable discussion of Marx's theory of wages relevant to our brief comments on the social cost of labour see R. Rosdolsky, The Making of Marx's Capital (London, 1977), 282-313. Bertram, "Historical Statistics," 133. On the importance of this period of price deflation in the United States see H.G. Vatter, The Drive to Industrial Maturity: The U.S. Economy, 1860-1914 (Westport, Conn., 1975); and on the twentieth century, H. Braverman, Labor and Monopoly Capital: The Degradation of Work in the Twentieth Century (New York, 1974). Acheson, "Social Origins of Elite," 162. J. Spelt, Urban Development in South-Central Ontario (Toronto, 1972), 101-86; E.J. Chambers and G.W. Bertram, "Urbanization and Manufacturing in Central Canada, 1870-1890," in S. Ostry and T.K. Rymes, eds., C.P.S.A Conference on Statistics, 1966 (Toronto, 1966), 225-55; and Bland, "Location of Manufacturing," 8-39. See the important statement in R. Samuel, "The Workshop of the World: Steam Power and Hand Technology in Mid-Victorian Britain," History Workshop Journal, (1977) 3:6-72. Spelt, Urban Development, 124-7; J.M. Gilmour, Spatial Evolution of Manufacturing: Southern Ontario, 1851-1891 (Toronto, 1972), 168-81; W.G. Phillips, The Agricultural Implement Industry in Canada (Toronto, 1956), 38-53; M. Dennison, Harvest Triumphant (Toronto, 1948), 93; and R. Ozanne, A Century of Labour-Management Relations at McCormick and International Harvester (Madison, 1967). D.F. Walker, "The Energy Sources of Manufacturing Industry in Southern Ontario, 1871-1921," Ontario Geography (1971), 6:56-66. The following paragraphs, unless otherwise noted, are based upon the works of Chambers and Bertram, Bland, Spelt, and Gilmour, cited above, as well as census data. On Hamilton see also Palmer, A Culture in Conflict, 3-31; and on Toronto, Kealey, Workers Respond, 1-34. Insight can also be gleaned from H.A. Innis and A.R.M. Lower, eds., Select Documents in Canadian Economic History, 1783-1885 (Toronto, 1933), 588-616. Note Lenin, Development of Capitalism (Moscow, 1964), 551 G.P.deT. Glazebrook, A History of Transportation in Canada, vol. 2 (Toronto, 1964), 91-118; K.L. Clark, "Social Relations and Urban Change in a Late Nineteenth-Century Southwestern Ontario Railroad City: St. Thomas, 1868-1890" (M.A. thesis, York University, 1976). For

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Stratford see Journal of the International Association of Machinists (Dec. 1890 and May 1893); and W.S. Johnston and H.H.M. Johnston, History of Perth County to 1967 (Stratford, 1967), 223-51. [18] M. Wolfe, "A Short History of the Carling Breweries, Ltd. 1840-1930," unpublished paper, University of Western Ontario Archives. [19] R.A. Trumper, "The History of E. Leonard & Sons, Boilermakers and Ironfounders, London, Ontario" (thesis, University of Western Ontario, 1937); B.S. Scott, "The Economic and Industrial History of the City of London, Canada from the Building of the First Railway, 1855 to the Present, 1930," (thesis, University of Western Ontario, 1930), 56-65, 16970; C.J. Grimwood, "The Cigar Manufacturing Industry in London, Ontario" (M.A. thesis, University of Western Ontario, 1934), 3; and on brewing and tobacco generally, see Innis and Lower, eds., Select Documents, 605, 607, 614-15, [20] Innis and Lower, eds., Select Documents, 594-6; J. Young, Reminiscences of the Early History of Gait (Toronto, 1880), 232; "A History of the Bell Piano and Organ Company, 1864-1928," (unpublished paper, University of Western Ontario Archives). On Brantford see C.M. Johnston, Brant County (Toronto, 1967); on Berlin see: W.V. Uttley, A History of Kitchener, Ontario (Waterloo, 1937); on Guelph see L.A. Johnson, History of Guelph, 1827-1927 (Guelph, 1977), 203-18; and C.A. Burrows, The Annals of the Town of Guelph (Guelph, 1877). [21] J.N. Jackson, St. Catharines, Ontario: Its Early Years (Belleville, 1976), esp. chs. 10, 11, and 14; and E. Tweed "The Evolution of St. Catharines, Ontario" M.A. thesis, McMaster University, 1960. [22] W. Gillard and T. Tooke, The Niagara Escarpment (Toronto, 1975), 108; and Innis and Lower, eds., Select Documents, 595, 610-11. [23] G.R. Osborne, Midland and the Pioneers (Midland, 1939). [24] R. MacKenzie, Leeds and Grenville: Their First 200 Years (Toronto, 1967). [25] L. Johnson, History of the County of Ontario, 1615-1875 (Whitby, 1973), 502; T.E. Kaiser, Historic Sketches of Oshawa (Oshawa, 1921), 160-7; "The Canadian Locomotive Company Limited; History of the Works at Kingston," Queen's Quarterly (1903) 10:455-65; Innis and Lower, eds., Select Documents, 594-5; information on Smiths Falls courtesy P. DeLottinville. [26] Report of the Select Committee on the Causes of the Present Depression of the Manufacturing, Mining, Commercial, Shipping, Lumber and Fishing Interests (Ottawa, 1876), 142-8; and Kealey, Canada Investigates Industrialism, 179-92.

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[27] This and the following paragraphs touch on themes developed more fully in B.D. Palmer, "Class and Culture in Nineteenth-Century Canada: Cleavage, Antagonism and Struggle," (unpublished paper), 1980. [28] Note the important discussion in G.M. Sider, "The Ties that Bind: Culture and Agriculture, Property and Propriety in the Newfoundland Village Fishery," Social History (1980), 5:1-39. [29] See P. Campbell Appleton, "The Sunshine and the Shade: Labour Activism in Central Canada, 1850-1860," (M.A. thesis, University of Calgary, 1974). [30] See E.A. Forsey, The Canadian Labour Movement, 1812-1910 (Ottawa, 1974), 4-7; and Labour Gazette (July 1902-June 1903) 3:606-7. [31] Palmer, A Culture in Conflict, esp. 71-96; and Kealey, Workers Respond. [32] D. Montgomery, Workers' Control in America: Studies in the History of Work, Technology and Labour Struggles (New York, 1979), 176. [33] Palmer, A Culture in Conflict, 35-70; Kealey, Workers Respond, 98-123; and Forsey, Canadian Labour Movement, 7. [34] Palmer, A Culture in Conflict, 125-51; and Kealey, Workers Respond, 124-53 [35] Forsey, Canadian Labour Movement, 7; and Labour Gazette (1903), 3:6067 [36] On the IMIU see C.B. Williams, "Canadian-American Trade Union Relations: A Case Study of the Development of Bi-National Unionism," (Ph.D. thesis, Cornell, 1964); Palmer, A Culture in Conflict; and Kealey, Workers Respond. For the moulders' important place in Smiths Falls, an eastern Ontario centre, see Rideau Record, 30 May, 6 June, 22 June, 4 July 1889. [37] Our use of the word "moment" here and throughout the book is intentional. Marx, like Hegel, employed the term "moment" to refer to an element or factor in a general system. But he also added the senses both of "period of time" and of "force of a moving mass," thus conveying much of what we meant to express in our formulation of the significance of the Knights of Labor and the particular context of North American society in the 1880s. See M. Nicolaus, "Foreword," in Marx, Grundrisse, 29. These brief comments should indicate that the term "moment" is not the property of any particular tendency within Marxism, but rather a part of a long-standing Marxist vocabulary, employed by such diverse writers as Althusser, Sartre, and E.P. Thompson. As D. Torr defined it in an editorial comment in the Marx-Engels Selected Correspondence, "moment" signifies an "element in the dialectical process of becoming." (See E.P. Thompson, The Poverty of Theory & Other Essays [London, 1978], 307.)

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The National Policy and the Rate of Prairie Settlement: A Review K.H. NORRIE

I

Nineteen seventy-nine marks the official centenary of the National Policy, and the unofficial one of what has become known as the national policy. The former term refers to the broad-ranging structure of protective tariffs introduced by the Conservative government of Sir J.A. Macdonald as promised in their 1878 election campaign. The latter, uncapitalized version is now taken to refer collectively to the combination of tariff, railway, land and immigration policies developed over the years after Confederation. Under most accounts, in fact, the national policy survived the electoral defeat of the Conservatives in 1896, with Sir W. Laurier and his government being perhaps even more vigorous (and successful) in pursuing this development strategy. The form the national policy took is easily appreciated by noting the implicit "model" of economic development held by the politicians of the day. The clear intent, as V.C. Fowke has argued,1 was to reproduce something akin to the commercial and industrial prosperity enjoyed during the agricultural development of Ontario in the first half of the century, or to the American boom that was so readily attributed to the continuous expansion of western settlement in that country. The Canadian West was to be the new agricultural frontier. Grain would be the export staple, requiring a host of linked commercial activities to gather it and market it in Europe. In turn, the derived demand of the agricultural population for goods and services would generate additional economic linkages. In fact, of course, western Canada did soon thereafter become a major grain exporting region, and the country did experience significant industrial development. This naturally raises the question as to how large a role federal government policies played in these developments. A long-standing historical view is that they were a major factor. The work of Innis, Creighton, Brebner and other leading historians, ". . . emphasized the positive role of the National Policy which by fostering secondary industry, transcontinental railways, and western settlement produced a national interdependent economy with one section of the country supplying the needs of the others."2 Source: K.H. Norrie, "The National Policy and the Rate of Prairie Settlement: A Review," Journal of Canadian Studies (Fall, 1979) 14(3):63-76. Reprinted with permission. This paper was presented to the Annual Meeting of the Canadian Historical Association at the University of Saskatchewan, Saskatoon, June 4, 1979. I would like to thank, without implicating in any way, D. Owram, M. Percy, and P. Phillips for their useful comments and suggestions.

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Some fifteen years ago J. Dales launched an all-out attack on what he called this "historians' stereotype" of the national policy.3 His message, in effect, is that these measures were neither necessary nor sufficient for the events that followed. In fact, he argued, they may have been even worse than irrelevant in that they acted to distort whatever economic development did occur. The tariffs promoted not industry, but rather inefficient industry. Giving away land at uneconomic prices led to much long-term harm to western Canada. Even the railway subsidies are criticized as having induced premature construction and, as being perhaps even excessive.4 This challenge by Dales has led to a considerable revival of interest in the national policy and its impact on economic development. In this centenary year it seems particularly appropriate to attempt to survey what we have learned to date. This forms the primary motivation for the present paper. A second one is that a good deal of the recent work has been done by economists, using techniques that are not necessarily familiar to a broader audience of historians who might still be interested in the results. Thus there seems to be a need for some kind of general, nontechnical overview of this material. Finally, for reasons that may not be unique to Canadian economic historians, much of the material has not yet been published and thus is not generally available to the nonspecialist. A comprehensive evaluation of the national policy divides naturally into three separate but related questions. Two deal with the efficiency aspects of the development strategy while the other concerns its income distributional consequences. First, in what manner if at all did the federal measures affect the timing, rate, and extent of western agricultural expansion? Following this, what was the net social benefit of these promotional activities? The second topic would pose these same two questions about the relationship between industrial development and tariffs, railways, and western settlement.5'6 As regards the equity issue much of the concern has been over the regional implications of the policies,7 but its effects on the personal and functional distributions of income are other interesting problems. For reasons of length, this paper deals only with the first issue. Section II looks at Dales7 critique in more detail, and examines his alternative explanation for the timing of Prairie settlement. The third section surveys several alternative hypotheses and the statistical evidence that has been marshalled for and against them. The intent in these two parts is to examine the literature to determine how, if at all, federal policies affected western agricultural expansion. Section IV then raises the question of what a socially optimal rate of settlement might have looked like, and uses this standard to evaluate the actual pattern. The final section makes some concluding comments. II Dales' main evidence against the national policy is that it failed to work for some twenty or thirty years. [Data on] the net accumulated free homesteads

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in each year from 1872 as a percentage of the total to 1930, [show that] the vast majority of the entries were made after 1900. By 1885 only 8.8 percent of the eventual total net homestead entries had been recorded, and by 1900 only 20 percent. By 1906, however, the proportion had reached 51.4 percent, and by the outbreak of World War I nearly 89 percent. Yet the Canadian Pacific Railway (CPR) had reached the Prairies by 1882, or 1883, the Homestead Act had assumed virtually its final form by 1882, and considerable efforts were being made to advertise the region to potential migrants. Given this, it is difficult to argue with Dales' contention that the efforts to promote western settlement were not sufficient in themselves. He goes further though and asserts that they were not even necessary: After 1900 the demand for western land was so brisk, and the C.P.R. and various land companies so zealous in attracting settlers to the region, that it is hard to believe that the homestead policy was in any sense necessary as a means of settling the West.8 An alternative explanation is proffered based on a rapid succession of exogenous developments—the familiar favourable conjuncture of events—in the mid 1890s that finally made prairie settlement feasible on a large scale. This list includes among other things a rise in wheat prices as a result of industrialization in Europe and the United States; falling transportation costs for wheat exports; the end of the American land frontier; the resumption of international capital flows and labour migration and technical breakthroughs in the production, transportation, and further processing of wheat. The implication for the national policy of this interpretation of the timing of Prairie settlement is significant. None of the above factors relies in any way on the federal initiatives. The inescapable conclusion is that settlement could not have proceeded any earlier than it did whatever promotional efforts the government might have made. Equally, it would have occurred when it did regardless of the national policy. The only article of faith required here, it would seem, is that the necessary railway mileage would have been available anyway, something not too difficult to accept given the motivation for rushing the CPR in the first place. At best then the national policy was irrelevant and likely as not, Dales would argue, it was positively harmful. Citing the favourable conjuncture of events in this manner does not provide a convincing alternative explanation, however. This can be seen by looking more closely at each of the items in the list. It is true, for example, that world wheat prices rose more or less continuously after 1894, but this ignores the fact that the levels after 1895 were significantly lower than those in the 1870s and 1880s.9 The reference to falling ocean freight rates is equally unconvincing since these charges had been falling continuously for many years prior to 1900.

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The figure of ultimate concern of course is the North American wheat price—the world price less transport charges. The Chicago price of number 2 wheat increased from 1870 through to 1882 while the world price fell, due to the decline in ocean freight rates noted above. It fell from 1885 to 1888, recovered slightly to 1891, fell to 1895, and then began a fluctuating recovery to World War I. But again, the average level over the period 1896-1914 was 84.9 cents, while that for the years 1879 to 1895 was 87.8 cents. What needs to be explained rather is why this range of wheat prices was associated with an economic boom after 1897 but not earlier. One obvious factor here is the further reduction in price from the export point to the farm gate due to transport costs. Grain was hauled from the local collection points to the central ones and then to the Lakehead by rail, meaning that the availability of rail lines and the rates they charged need to be taken into account in a proper analysis. Since the provision of railroad mileage was a central concern of the national policy this raises the possibility that it did play a part in stimulating prairie settlement. Clearly the railroad issue needs to be dealt with in more detail, something that is done below. The view that the resumption of international flows of capital and labour were responsible for the boom is equally difficult to accept. [The] upturn in free homestead entries can be dated from 1897, and was well underway by 1900. Yet the major inflows of capital and labour only appeared later on in the decade. In the case for capital, for example, G.M. Meier notes, It is significant that the noticeable acceleration of growth in the Canadian economy after 1895 did not initially depend on the inflow of foreign capital. Not until 1905 did foreign borrowings reach significant proportions. . . . 10 In his study of immigration, B.C. Corbett notes, But it can be urged, I think, that immigration was not as important an active causal factor in agricultural development as other factors. . . . The role of immigration in agricultural settlement was passive and responsive. . . .n In both cases then the inflow of these factors must be viewed as responding to economic opportunity rather than initiating it. The linking of the closing of the American frontier to the beginning of prairie settlement is commonplace.12 But this overlooks the fact that the disposal of the public domain via homesteading in the United States took place at a greater rate after 1896 than before. Between 1881 and 1890 there were 497,083 homestead entries on 69,773,000 acres of land. In the 1890s these figures dropped to 456,943 and 62,857,000 respectively. But from 1901 to 1910 homestead entries rose dramatically to 832,140 and the acreage nearly doubled to 130,647,000.13 In addition, as P. Hartland notes, the expansion of Australian

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and Argentinian wheat production and exports in the 1880s and 1890s suggests that the world market for food was expanding rapidly enough to absorb supplies in excess of the American output.14 Technical breakthroughs do not appear to provide the answer either. Marquis wheat was not even commercially available in the first decade of the century. Its earlier ripening features were instrumental in allowing the extension of settlement into the more northerly areas, and would not have been a factor in the regions that received the bulk of the settlement between 1897 and 1911. Advances in the milling of wheat, the development of the steel-tipped plough, barbed wire and the like came out of the earlier American boom, and were thus available to Canadians at that time. It is rather their limited diffusion to 1895, and their rapid diffusion thereafter, that need to be explained. In sum then, while Dales did succeed in raising serious doubts about an uncritical acceptance of the role of the national policy in promoting prairie settlement, the alternative explanation based on a series of exogenous supply and demand shifts does not fare very well either. Until the major factor or factors responsible for delaying agricultural expansion can be identified little can be said one way or another about the necessity of the government measures. Ill One alternative explanation for the timing of the prairie wheat boom has been proposed by the present author.15 In this interpretation the Canadian settlement is viewed as part of the larger North American agricultural expansion. A distinction is made between sub-humid and semi-arid lands, and between land generally free from the risk of frost and that not given the wheat strains available in the nineteenth century. In the United States the transitional zone from sub-humid to semi-arid land is generally put at the ninety-eighth to onehundredth meridians. In Canada the only sub-humid, frost-free area is the Red River area of south-central Manitoba. The northern Park Belt region does not have the same aridity problems as areas further south, in part because of lower evaporation loss, but its growing season is significantly shorter. Thus until the development of earlier ripening varieties of wheat after 1900 this northern area was beyond the feasible margin of settlement. The reason for emphasizing the aridity distinction lies in the fact that sub-humid land could support cropping with conventional (at the time) techniques, while semi-arid land could not. In the most arid parts of the Prairies— the Palliser Triangle section of southwestern Saskatchewan and southeastern Alberta—rainfall was simply inadequate to provide a crop except under unusually favourable circumstances. In other areas the problem was the extreme variability of yields rather than the long-term average. Continuous cropping in the transitional dark brown soil zone apparently would have given a long-run average yield equal to or even above that ultimately obtained under different techniques. But the average would have included both bumper crops and years

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with little or no return. Assuming that settlers were averse to risk, an asset with a given expected return but low variance would have been preferred to another with the same mean yield but with a higher dispersion of annual outcomes. In other words, the variability of yields per se from continuous cropping of semi-arid land was an unattractive feature to most potential migrants. With these considerations the pattern of the westward spread of settlement can be readily explained. Sub-humid land would always be chosen over semi-arid. After 1870 the only sub-humid land remaining was that east of the ninety-eighth to one-hundredth meridians in the United States and the limited area in Canada around the Red River. In fact, of course, settlement in the 1870s and 1880s was largely confined to these two areas. There were encroachments on the semi-arid lands in both countries in these years, but they lasted only as long as the attendant abnormal rainfall did.1*5 Since there was a much greater supply of sub-humid land in the United States it was inevitable that the American boom after 1879 would dwarf the Canadian one, and that many Canadians would be attracted south of the border. As settlement approached the feasibility margin in both countries, however, there was an incentive to develop methods to overcome the obstacles to cultivating semi-arid land. Thus it is no accident that the apparently independent efforts of A. Mackay at Indian Head and H.W. Campbell in South Dakota both date from the mid-1880s. Campbell's work came to emphasize deep ploughing of the soil, subsurface packing, and frequent surface cultivation.1^ Mackay on the other hand championed the practice of summerfallowing. By storing moisture in the subsurface of the soil from one year to be used for the next year's crop, this technique increased the average yield in those drier areas which otherwise could not support any cropping. In the transitional areas, summerfallowing reduced the variability of yields, thus making the land more attractive to individuals averse to risk. The result of these technical changes was to open up an entire new area for settlement. Yields were higher, or more certain, meaning that for any given expected grain prices and operating costs, settlement in the Canadian Prairies was now more profitable than it had been before. In technical terms the homestead response function, linking the number of settlers opting for the Canadian Prairies to the expected profitability of farming there, had shifted upwards. As wheat prices started rising again after 1896 this land was rapidly filled in, along with the semi-arid land in the United States. This also explains the large number of American free-homestead entries after a date when the frontier had supposedly closed. This interpretation is essentially a modification and refinement of the old idea that settlement of the Canadian Prairies had to await the filling in of the American land. As such, it points to the exhaustion of American subhumid land, the development of appropriate dry farming techniques and the rise in world wheat prices after 1896 as the key factors explaining the wheat

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boom. By implication then, the national policy could have had little or no impact. Promotional efforts were unlikely to attract or even retain anyone as long as better land was available in the United States. Even the extension of railroad mileage into unsettled areas was unable to promote anything much beyond some speculative ventures before 1896. Thereafter settlement proceeded rapidly and railroad construction was largely a response to it rather than a cause of it.18 On the other hand, under this view the government cannot either be accused of delaying settlement to 1897 and later by not opening up the entire Prairies to free homesteading, as C.M. Studness has charged.19 He calculated that the net revenue per acre from wheat farming in Canada was higher than that in the United States prior to 1900, and concludes that the relative lack of free homestead land in Canada must have been the impediment. If the Canadian government had located CPR lands in more remote areas, and had encouraged more extensive railroad construction through cost subsidies, ". . . there is little reason to believe that development before the turn of the century could not have been more extensive."20 If the present argument is to be believed, however, the government could have thrown the entire semi-arid belt open to free homesteading without changing much prior to 1897. The implication of this line of reasoning must be that the entire national policy was essentially irrelevant to the actual timing.21 Nevertheless the interpretation is only an assertion, and the question remains as to whether there is any empirical support for it. The original paper developing the hypothesis presented a regression model linking annual free homestead entries to Winnipeg wheat prices. A lagged adjustment settlement response was incorporated, and there was an attempt to distinguish among the three subperiods 1879-1886, 1887-1896, and 1897-1911. These results were presented as being consistent with, but definitely not in any way proving, the hypothesis. There was no apparent change in structure over the years 1879 to 1896, which is consistent with the view that this was the period of settlement of sub-humid land. There was a sharp break around 1896, however, represented by the much longer time that it took for any given change in wheat price to attract the settlement that was ultimately to be associated with it. This was interpreted as representing the uncertainties of venturing onto semi-arid land with an as yet untried technology, and the subsequent slow learning process. The argument also requires that settlers be shown to be averse to risk, for otherwise settlement should have been attracted earlier by the comparably high long-term average yields obtainable in the transitional zone by means of continuous cropping. This was done subsequently22 by showing that the net impact of summerfallowing in significant areas of the Prairies was to reduce long-run average yields below those attainable by continuous cropping, but that farmers employed the technique regardless. It is interesting to note, however, that only in rare cases did they plant all of their crop on fallow. More often

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they did so on only a portion of the land, the rest being planted on one- or two-year-old stubble. Further, the proportion planted on stubble tended to vary inversely with the variability of the rainfall received. In technical terms, farmers were diversifying their holdings by simultaneously putting some of the seeded acreage on fallow land with its more secure return, and the rest on stubble with its less secure yield but zero opportunity cost. It was shown that the nature of this choice, and the pattern of cross-sectional variation in it, could be predicted by a model that uses risk aversion to explain the simultaneous holding of money and interest-bearing assets. The conclusion was thus drawn that homesteaders in this period were indeed averse to risk, that the variability of returns in parts of the Prairies as well as the outright aridity in others was a real impediment to settlement with traditional techniques, and that summerfallowing provided the key to opening up this large area to cultivation. The regression analysis in the original paper has been criticized as being an inadequate formulation of the homesteading process. K.G. Grant23 argues that the appropriate dependent variable is the stock of free homesteads at the end of any year rather than the flow during that year. Thus his model relates the change in the cumulated sum of free homestead entries during any year to the level of grain prices in the previous period, again allowing for a lagged adjustment. The same point was made by W. Marr and M. Percy.24 In addition they introduced a new and apparently superior series for wheat prices attributable to O.K. Harley,25 and deflated it by the wholesale price index to make changes in the stock of free homesteads a function of real rather than nominal prices. Both papers, however, conclude that the results they derive with these alternative formulations are consistent with the dry-farming hypothesis.26 The Marr-Percy paper made a couple of important additions to the model of prairie settlement of particular importance to this paper. First, the miles of completed railroad were entered as an additional explanatory variable on the grounds that for any given output price, the greater the extent of the railway network the larger would be the stock of agricultural land within the feasible margin. In addition, they attempted to allow for the impact of government advertising expenditures on the rate of settlement. While the ultimate number of free homesteads would depend only on grain prices and railroad mileage it was reasoned, the speed with which homesteaders reacted to changes in these variables would be affected by the government's promotional efforts. Thus the speed-of-adjustment coefficient was itself made to be a function of the annual expenditures on immigration with a one-year lag. The results they obtain are interesting. The coefficient on the railroad mileage variable is significantly large for the period 1887-1896 than for 18791886. In other words, any given extension of the railroad network in the latter period was associated with a larger addition to the stock of free homesteads than in the earlier years. Since the major part of the railway construction to

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1886 was connected with completing the main line, while that for the next ten years was with developing a system of branch lines, this result makes intuitive sense. The period 1897 to 1911 differs from the earlier ones in one of two respects. Either the response of settlement to additions to the railway network was even greater, or the value of the intercept was greater. These separate results were obtained from two different regression equations, and since there is no logically correct specification for the relationship it is impossible to choose one over the other. Either result, however, is consistent with the dry-farming hypothesis. They obtained mixed results with the advertising variable. It was statistically significant in all three periods, yet bore a negative relationship to the stock of free homesteads from 1879 to 1896, and a small positive one thereafter. Literally interpreted, the findings for the early period imply that an increase in advertising efforts in a year led to a smaller change in free homestead entries the following year. These seemingly perverse results can perhaps be explained, as the authors note, by recognizing that the direction of causality runs as much from homestead entries to advertising expenditures. Thus the disappointing results before 1896 may have led to a redoubled effort by the authorities. If immigration expenditures are correlated over time, even entering them as an explanatory variable with a one year lag would generate the negative sign. Given this ambiguity as to the effect of these expenditures though, one wonders why the authors conclude so unequivocally that the positive relationship obtained after 1897 confirms the hypothesis. The Marr-Percy results provide a possible avenue for those wishing to defend the efficacy of the national policy of this period. For if railroad mileage was an important determinant of the size of the homestead response, and if it could be shown that the government's railroad policy actually promoted rail lines where none would have been otherwise,27 then the policy must have had some positive effect. In addition, if the net addition to output as a result exceeded the opportunity costs of the resources utilized to construct the railroad, then it could be concluded that the efforts were socially beneficial. Much the same argument applies to immigration expenditures, except that the net positive effect results from homesteaders cultivating the same land earlier than they otherwise would have, rather than that there was an actual permanent expansion of the total cultivated acreage. This net addition to output, compounded at an appropriate interest rate, would then have to be compared to the social costs of the advertising expenditures to judge their net impact. While none of this has been done, the point of interest here is simply that the Marr-Percy paper does at least open up the possibility that the promotional efforts did play some role. Neither version of the stock adjustment formulation, however, is really an appropriate test of the dry-farming hypothesis. The argument in the original paper was essentially that the establishment of rail connections to export points

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in 1879 meant a large, irrevocable shift in the area of sub-humid land available for cultivation. The experience of subsequent years involved the rate at which this intramarginal land was filled in. The same is true for the period after 1896. The filling-in of the sub-humid land in Canada and the United States and the availability of suitable dry farming techniques meant another onceand-for-all shift in the extensive margin of cultivation, this time a much larger one. Again, the following period witnessed the progress by which the actual margin of cultivation was extended to meet the potentially feasible one. Price changes would affect the exact delineation of this latter frontier of course, but this effect would not necessarily be noticed in the early disequilibrium years.28 The stock adjustment model really only becomes a valid representation of the adjustment process once an initial equilibrium is reached where the actual settlement frontier is concomitant with the feasible one. It would not seem to have much relevance to a period when only intramarginal land was being settled. These considerations suggest that a more realistic model of the settlement process would need to specify the determinants of both the long-run equilibrium stock of homesteads as well as the rate at which the intramarginal units were occupied. S. Borins has provided a preliminary and partial model along these lines.29 He notes that an econometric model would explain both the settlement flows and levels over time and space. The dependent variable is the number of homesteads settled in each of several land districts by year as a proportion of those ultimately taken up. This ratio takes on values between 0 and 1, although he also estimates it with all values below 0.03 and 0.97 truncated. The explanatory variables are real wheat prices and per capita gross national products (GNPs) in Canada, the United States and the United Kingdom, which vary over time; proxies for moisture and frost danger, which vary over space; and railroad mileage, which varies over both. In terms of the above discussion, Borins attempts to explain the adjustment from one equilibrium to another. The speed with which the prairie farm land was filled up is related to the expected profitability of each subregion at any point in time. Interestingly, grain prices were never significant with the predicted sign, which is consistent with the view that the process was largely a disequilibrium one. The relative real income variables give mixed results, with the ratio of the Canadian to British one being significantly positive, while the Canadian to American one was often negatively correlated. In light of the certain simultaneity between agricultural expansion and Canadian GNP, however, such perverse results are perhaps not unexpected. The climatic variables turn out as expected. On a cross-sectional basis those lands with greater average moisture and longer frost-free growing periods were settled first, which is consistent with the dry-farming hypothesis. Finally, the railroad mileage variable is highly significant, confirming the Marr-Percy results and suggesting again a need to take the factor into account when evaluating the national policy.

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The most recent attempt to model the determinants of prairie settlement, and to test a variety of hypotheses in the process, is contained in a paper by M. Percy and T. Woroby.30 They take a totally different approach in that they examine the cross-sectional variation in the observed American migration to Canadian free homesteads. In addition, they begin with a formal, human capital model of migration rather than an ad hoc specification. The observed migration to Canada from each of the states, as a proportion of the total potential flow, is related to distance, advertising expenditures by the federal government, state farm tenancy ratios,31 the ratio of American to Canadian real wages, and a dummy variable for states where dry-farming techniques were commonly employed. The latter term represents an explicit attempt to test whether a previous association with dry-farming increased the probability of migration to the Canadian Prairies. If it did, this could be taken to imply that acquiring these skills was an important prerequisite to successful settlement. For their test of the dry-farming hypothesis, the conclusion is that "... a statistically significant difference existed between dry-farming and nondry farming states in the determinants of rates of migration to the Canadian Prairie."32 K. Bicha's agricultural ladder hypothesis does not receive the same support though. The paper demonstrates that there was a remarkable synchronization of free homestead entries from the United States, the United Kingdom, and Canada over the period 1894-1913, suggesting that it is incorrect to focus on factors specific to one sending country only. Finally, and in support of earlier work by one of the authors cited above, the level of advertising expenditures was found to be a significant factor in 1901 but not in 1899. Thus far the discussion of the relationship of railroads to the timing of prairie settlement has been limited to the mere presence of the lines themselves. But the rates charged on both incoming and outgoing goods might be expected to play some role. There has long been concern in the west over the allegedly adverse effects of freight rate levels. On the other hand, however, there is also a firmly held conviction that the rate reductions of 1897, stemming from the Crow's Nest Pass Agreement, were instrumental in opening up the region to settlement. The implication of this view is that earlier rate reductions would have speeded up settlement or, alternatively, that in the absence of the agreement the wheat boom would have occurred late or have been significantly circumscribed in extent. It seems unlikely that this conclusion would receive much empirical support however. The 1897 agreement reduced rates by 3 cents per hundredweight, or about 1.8 cents per bushel. The price of number 1 Northern wheat at Winnipeg in 1897 was 79 cents per bushel, so the rate reductions would have amounted to a percentage increase in the farm gate price of 2.3, assuming that producers bore all the transport costs. If any of the reduction were shifted forward the effect would be even less. In addition, since wheat prices rose generally after 1897, the percentage impact would have been even less

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subsequently. A recent study of the American wheat-producing states for the period 1872-1913 found that the area in crops in any year as a proportion of the eventual area in 1913 was responsive to changes in the real price of wheat, but with an elasticity below l.O.33 If these results are applicable to Canada, the increase in land area in any year as a result of the Crow's Nest Pass reduction amounted to at most 1.6 percent. Even this has to be modified to account for the fact that the actual rates charged were below the maximum areas from 1903 to 1917 as a result of increased competition. Thus any impact they did have, slight as it was, was also restricted to the years 1899 (allowing for the two-year transitional period) to 1902. Focussing on the impact of the Crow's Nest Pass Agreement on rate levels and hence on wheat prices may lead to serious underestimation of the impact of the agreement, however. G. Wogin has recently introduced a new and potentially very important perspective on this debate.34 She begins by asking why the CPR would ever have agreed to a rate reduction "in perpetuity," in exchange for a cash subsidy to build one branch line. The answer she provides is that by agreeing to regulation the CPR was effectively demonstrating to farmers that the rates they anticipated charging in the medium-term future were no higher, and probably even less, than the current ones. A mere assertion of this by the company would not have been credible. Potential settlers still might have believed that the railroad would begin to exploit its monopoly position once they had made the necessary investments in a farm. By agreeing to be held to a maximum rate though, the CPR alleviated this fear. With this uncertainty removed, the price that the homesteader would be willing to pay for land ought to increase. If the CPR felt that this appreciation in the sales value of its land exceeded any anticipated losses from freight rate limitations, it would thus have been economically rational for it to enter into this agreement. In effect, they were trading a potential future loss from constraining their ability to set freight rates for an immediate capital gain from their land holdings. Since they had good reason to believe that they would ultimately be subject to regulation anyway,35 they were probably not giving up much. They could also be reasonably certain that the anticipated increase in settlement would generate additional traffic, allowing them to move down along a declining long-run average cost curve. The lower rates, in other words, would still be remunerative. If this argument is accepted, and it has yet to be tested, it has significant implications for an evaluation of the national policy. The removal of the uncertainty surrounding future rate increases would increase the attractiveness of free homestead land as well. If the uncertainty discount were sufficiently large, its removal could have meant a significant once-and-for-all shift in the feasible margin of settlement. Thus by striking this deal with the CPR, the government would have removed a major obstacle to the settlement of the region.

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The force of this argument depends on the degree to which it can be established that farmers did fear an ultimate exercise of monopoly power by the CPR and felt there was no alternative recourse. FVeight rates had been falling prior to 1897, and this is usually ascribed to increasing competition. Thus one would have to show why people were not building expectations of even greater competition into their predictions. It was mentioned above that the CPR might not have felt it was giving up much by agreeing to rate regulation since it was going to face at least the threat of it sooner or later anyway. But if the CPR could reason in this way, so could potential settlers. Alternatively, it could be argued that the CPR agreed to the limitation because it felt it had the political power to have it revoked whenever necessary. But again, the would-be immigrants had at least as good grounds for believing this as the CPR, and thus the agreement really would not have had any effect. In sum then, the hypothesis needs to be subjected to careful testing before it can be used to explain the timing of the wheat boom. The literature on the timing of prairie settlement can be summarized very briefly then. The link between the occurrence of the wheat boom and the national policy, made often and casually in the past, seems to have been rejected, but so has the rote recitation of a series of external disturbances. The emphasis has shifted instead to a more carefully specified series of exogenous factors, specifically the end of the American frontier of sub-humid land, the development and diffusion of appropriate dry-farming techniques, and the movements in relative real wages in Canada, the United States, and the United Kingdom. Within this view the federal government's promotional efforts played a role only in so far as they aided in the development and diffusion of dry-farming technology, increased the speed by which settlers reacted to the emergent profit possibilities through advertising expenditures, and aided in the development of branch lines. In all these cases though, it still needs to be established that the national policy did not simply substitute for developments that would have occurred anyway. In addition, for the policy to be judged a success in even these modest dimensions, it must be true that the resulting additions to total output exceeded the opportunity costs of the resources used in promoting them. IV To this point the analysis has been conducted within the broad framework of a standard human capital model of migration. Homesteaders are viewed as beginning to come to the Prairies as the expected net present-value of investing in a farm, inclusive of opportunity costs, turned positive. The national policy was accordingly evaluated as to whether or to what extent it shifted either the expected gross returns or the costs to farming. The net worth of the policy, it was then suggested, would be the additions to output less the opportunity costs of the resources used in effecting the changes.

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Two recent contributions on federal lands policies, however, one for Canada36 and one for the United States,37 have questioned whether even this is a sufficient evaluation of these development strategies. They argue instead that the very institutional structures of the free homestead and railway land grant systems probably induced agricultural settlement and rail line construction before it was socially profitable. In other words, far from being beneficially stimulative or even largely irrelevant, the policies actually led to a significant misallocation of scarce resources. Since this argument implies a potentially strong condemnation of policies that have generally been considered above reproach, it is worth looking at in some detail. In this approach, the settlement of agricultural land is treated as a dynamic problem involving investment alternatives over time. The object is to determine the optimal time to clear and bring into production any potential acreage. At any moment in time a would-be investor is assumed to be able to predict an annual stream of net returns from farming the land inclusive of opportunity costs, and to capitalize these to arrive at a present-value figure. Against these the investor has to set the costs of clearing and preparing the land, assumed to be a once-and-for-all outlay. The socially optimal point at which to prepare the land for cultivation, then, is that which maximizes the difference between the present-value of the rental stream and the figure for the set-up costs. In this way the homesteader captures the greatest possible economic rent from the land, and society as a whole benefits from a proper allocation of scarce resources among competing uses. Mathematically the solution to the above problem turns out to be the requirement that clearing and cultivation commence when the annual net rental flow just equals the annual interest charges on the set-up costs. Any settlement before this date is premature in the sense that the annual net revenue, though positive, is less than the opportunity costs of the funds sunk into preparing the land. In this case society would have been better off if the homesteader had delayed clearing the land and instead invested the resources in the alternate uses for which the return was higher. On the other hand, delaying settlement past this point is also wasteful since there is foregone production which can never be recouped. In this case, the returns to producing agricultural products would have exceeded those obtained from whatever alternative use the resources were put to. These results can be depicted graphically as in Figure 1. Net annual returns v(t) are shown as initially negative but rising over time, due to increasing grain prices or technological progress, to name two factors. For any given interest rate r, the opportunity cost of the set-up costs C, will be a constant equal to rC, and thus shown as an horizontal line. In the diagram the socially optimal settlement date is t*. Farming operations will commence on that date, and in each subsequent period the farmer will garner the difference between

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v(t) and rC. It is the opportunity to appropriate this economic rent which is assumed to attract settlers to the region. The discussion in Section III was essentially about how the national policy might have affected the date at which these curves intersected. The development and diffusion of dry-farming technology, for example, would have shifted the v(t) curve upwards relative to the rC one, thereby moving the optimal settlement date ahead in time. More rail lines or lower rates would have had the same effect, while the tariffs on agricultural implements would have reduced net returns and delayed the agricultural expansion. The essential point to note for purposes of distinguishing this literature from that to be discussed below is that Section III assumed, implicitly at least, that the optimal date t* was the one actually chosen, and thus the private investment decisions made in the period generated a social optimum as well. Why the land disposition system employed may have led to a socially inefficient allocation of resources becomes clearer if we examine a hypothetical alternative; one that would have necessarily generated the optimally timed response. Suppose that all of the prairie land held by the government is periodically put up for auction. The price that any individual would pay for a specific acreage is the capitalized value of the annual economic rents he or she expects to earn from the land. As was seen above, this figure is at a maximum only if the land is cleared and cultivation commences exactly at t*. Any other initiation date will yield a lower present-value and thus a lower maximum bid for the ownership of the land. If the auction is competitive the would-be owner is forced to bid up to the maximum, with the result that the government would have appropriated all of the anticipated economic rent. To make even a normal rate of return, then, the purchaser will have to produce this maximum set of future rents, which means that he or she will of necessity commence farming operations at t*. The purchaser who deviates to either side of this point, will lose out by having paid too much for the land. Thus the competitive bidding system ensures that the maximum possible price will be paid for the land, and the fact that this is the price that must be paid guarantees that the socially best starting date will be chosen. Suppose now, however, that the land is given away rather than sold, and that eventual title depends on the investor initiating clearing and cultivation at once. In this event, the historically relevant one for about half the prairie land, whoever lays claim to the land will capture any of the economic rent accruing to it. Claiming the acreage and commencing agricultural operations at time t* will still yield the maximum ultimate return. But now the competition for this is based not on willingness to pay but on priority in laying claim to the land. Thus it would pay someone to lay claim to the land, and begin clearing as required, one period before t*. The overall economic rent that will thereby be appropriated is lower than if the purchaser had waited another year, since opportunity costs of clearing the land will not be covered in the first year of

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operation, but it will still be positive. If this is true, however, then it pays yet another individual to claim the same piece of land and commence farming two periods before t*. The individual does not earn enough to cover rC for the first two periods now, but is still ahead overall. Extending this reasoning to its logical conclusion yields the following observation. With competition for the homestead, the date at which it actually is claimed will be pushed back to the point where the value of the economic rent expected from it is exactly offset by the opportunity costs incurred from too-early settlement. As long as any economic rent is left, someone will lay claim to the land even earlier. The person finally obtaining it will be that individual for whom investing the sum for clearing costs C at interest rate r will give as large a lifetime return as farming the land would have. In technical terms, all of the economic rent has been dissipated by too-early settlement.38 The same type of argument has been applied by C. Southey to the case of railroad charters as well. As part of the subsidy, the government granted land to the railroad companies, but it was generally tied to a commitment to begin construction immediately. In these respects this is exactly analogous to the granting of a homestead to an individual. In the competition to gain access to these land grants, and the expected economic rent to be derived from them, the railroads would promise to begin construction earlier and earlier. In the limit, as above, the line would be initiated enough in advance of the "best" date that all the eventual economic rents ultimately absorbed would just be sufficient to offset the below-opportunity-cost returns of the early years. The economic rents would again be dissipated through premature investment, something that has long been suspected in the Canadian case. While these points are not intuitively appealing, it is not immediately clear how relevant they are to the Canadian case. As with the Wogin hypothesis regarding the Crow's Nest Pass Agreement discussed above, much empirical work remains to be done. Consider first the fact that a large proportion of those settling on the Prairies came from the United States and Europe. It is unlikely that they would have come to Canada in the absence of the wheat boom. Any funds they sunk into premature homesteading—at least those funds the immigrants brought with them—would not have been available to the Canadian economy otherwise. Thus Canada as a whole did not incur an opportunity cost in the early years of the magnitude implied by the model. The economic rent would still have been dissipated when viewed on an international scale, but Canada would have gained by the net addition to output while the opportunity costs are borne by the sending nations. Another consideration is that the model might never have been empirically relevant in the Canadian case. This can be illustrated as in Figure 2. The socially optimal settlement date is again t*, while ti is that date at which the opportunity costs will just exhaust the eventual economic rent generated over the lifetime of the farm. Suppose now that the actual historical date is

Policy on Prairie Settlement

Figure 1:

Figure 2:

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K.H. Norrie

t2 to the left of ti. Here even giving away the land cannot induce any settlement. In historical terms, t* might be 1910, ti equal to 1902 or 1903 and t2 set somewhere in the early 1890s. If over the next few years there are one or more technical or policy changes which increase the profitability of growing wheat, the v(t) curve will shift upwards, if the changes are dramatic enough t* will move leftwards to t**, equal to or even to the left of the actual date. Now it is socially optimal to cultivate the land as quickly as possible, or at least until the net additions equal the social costs of providing for rapid expansion if the latter are thought to be rising. In this case, of course, there is no premature settlement and thus no rent dissipation. The homestead act would be largely irrelevant to the fact or timing of settlement. Its only effect would be to direct whatever economic rents there ultimately are to the settler rather than to the government39—since the land could have been sold—and perhaps to affect the order in which homestead and land ultimately sold were occupied.40 Thus if any of the Section III hypotheses purporting to explain a structural change in the profitability of wheat growing could be established with any conviction, the Southey conjectures about the possible impacts of the free homestead policy would be unfounded.41 V This paper has attempted to survey in a reasonably nontechnical manner the economic history of the last decade that has dealt with the national policy and the rate of prairie settlement. As was evident throughout, a consensus has not been established. Nevertheless many issues have been clarified, several sophisticated attempts at empirical verification have been made, and a host of interesting new insights have emerged about what remains to be done. Thus the only safe prediction to be made at this time is that the literature in the area will continue to grow. Indeed, as Jack Madden has said, the production of papers on the wheat boom will probably exhaust in the end all the surplus that the event itself ever created.42

Notes [1] V.C. Fowke, "The National Policy—Old and New," Canadian Journal of Economics and Political Science (August, 1952) 18(3): 271-86. [2] Introduction to J.H. Dales "Some Historical and Theoretical Comments on Canada's National Policies," reproduced in B. Hodgins and R. Page (eds.), Canadian History since Confederation (Georgetown, 1972), 141. [3] J.H. Dales, "Some Historical and Theoretical Comments." The article first appeared in Queen's Quarterly (1964) 71:297-316.

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[4] This was subsequently confirmed by P.J. George, "Rates of Return in Railway Investment and Implications for Government Subsidization of the CPR: Some Preliminary Results," Canadian Journal of Economics (1968) 1:740-62; see also I.J. Mercer, "Rates of Return and Government Subsidization of the Canadian Pacific Railway: An Alternate View," Canadian Journal of Economics (1973) 6:428-37; P.J. George, "Rates of Return and Government Subsidization of the Canadian Pacific Railway: Some Further Remarks," Canadian Journal of Economics (1975) 8:591-600; and E.F. Haites, "Government Subsidization of the Canadian Pacific Railway: A Review of the Issues" (mimeograph, 1976). [5] The role of the tariffs in promoting industrial development has not been rigorously studied yet. Dales repeats Mackintosh's assertion that Canadian manufacturing was developing well before 1879. He also notes that this sector developed more slowly than its American counterpart both before and immediately after imposition of the duties, but more rapidly during the wheat boom years after 1900. The alternative to tariffs in other words was not necessarily no industry, but rather a somewhat different and more efficient manufacturing sector. An attempt by McDougall to test for the impact of the tariffs proved inconclusive ("The Domestic Availability of Manufactured Commodity Output, Canada 1870-1915" Canadian Journal of Economics [1973] 6:189-206). [6] The welfare effects of the Canadian tariffs have been studied in great depth. Dales' monograph was a pioneering effort in this regard. For a comprehensive and up-to-date account of the literature that has followed the reader is referred to Economic Council of Canada, Looking Outward: A New Trade Strategy for Canada (1975) and the various background studies to the report. [7] The classic reference here is the Rowell-Sirois Commission. For an attempt to evaluate some of the western claims see K.H. Norrie, "The National Policy and Prairie Economic Discrimination 1870-1930," in D.H. Akenson (ed.), Canadian Papers in Rural History (1978) 1:13-32. For a Maritime perspective see B. Lesser, "The Maritimes and Confederation: A View of the Regional Impact of the National Tariff Policy of 1879" (paper presented to the ninth Conference on Quantitative Methods in Canadian Economic History, University of Western Ontario, March 17-18, 1978). [8] Dales "Some Historical and Theoretical Comments" 302. [9] C.K. Harley, "Transportation, the World Wheat Trade and the Kuznets Cycle." Paper presented at the MSSB Conference on Exports and National Economic Growth, 1975 (Princeton, forthcoming).

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[10] G.M. Meier, "Economic Development and the Transfer Mechanism: Canada, 1895-1913," Canadian Journal of Economics and Political Science (1953) 19:3. [11] D.C. Corbett, "Immigration and Economic Development," Canadian Journal of Economics and Political Science (1951) 17:364. [12] See K.A.H. Buckley, Capital Formation in Canada (Toronto, 1955), 15. [13] Historical Statistics of the US, Colonial Times to 1957 (Washington, 1960), 237. [14] P. Hartland, "Factors in Economic Growth in Canada," Journal of Economic History (1955) 15:13-22. [15] K.H. Norrie, "The Rate of Settlement of the Canadian Prairies, 18701911" Journal of Economic History (1975) 35:410-27. [16] Norrie, "The Rate of Settlement," 420-24. [17] M.W.M. Hargreaves, Dry-Farming in the Northern Great Plains, 19001925 (Cambridge, 1957). [18] See W.A. Mackintosh, Prairie Settlement—The Geographical Setting (Toronto, 1934), ch. 3. [19] C.M. Studness, "Economic Opportunity and the Westward Migration of Canadians During the Late Nineteenth Century," Canadian Journal of Economics and Political Science (1964) 30:570-84. [20] Studness "Economic Opportunity," 583, fn. 21. [21] Except perhaps in so far as the government funding of the research and its diffusion made the technique more widespread and easily available than it might otherwise have been. [22] K.H. Norrie, "Dry-Farming and the Economics of Risk Bearing: The Canadian Prairies, 1970-1930," Agricultural History (1977) 51:134-48; "Cultivation Techniques as a Response to Risk in Early Canadian Prairie Agriculture" (University of Alberta, Department of Economics, research paper no. 78-23, 1978). [23] K.G. Grant, "The Rate of Settlement of the Canadian Prairies, 1870-1911: A Comment" Journal of Economic History (1978) 38:471-73. [24] W. Marr and M. Percy "The Government and the Rate of Prairie Settlement" Canadian Journal of Economics (1978) 11:757-67. [25] Harley, "Transportation." [26] For a comment on Grant's conclusion in this respect see K.H. Norrie "The Rate of Settlement of the Canadian Prairies, 1970-1911: A Reply" Journal of Economic History (1978) 38:474-75.

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[27] Alternatively, they might only have speeded up their construction. In this event they would need to be evaluated as to their net contribution in the same manner as the promotional efforts. [28] Thus one would not necessarily get statistically significant coefficients for a price elasticity if the equation is only estimated over the transitional period. Marr and Percy, for example, do not find any of these estimates significant in the regressions they report. [29] S.F. Borins, "An Econometric Model of Western Canadian Settlement, 1882-1918," (mimeograph, 1975). [30] M. Percy and T. Woroby, "The Determinants of American Migration by State to the Canadian Prairies: 1899 and 1909," (mimeograph, 1978). [31] To test the so-called agricultural ladder hypothesis advanced by K. Bicha, "The Plains Farmer and the Prairie Province Frontier, 1897-1914," Proceedings of the American Philosophical Society (1965) 109:398-440 [32] Percy and Woroby, "The Determinants," 20. [33] C.K. Harley, "Western Settlement and the Price of Wheat, 1872-1913," Journal of Economic History (1978) 39:863-978. [34] This is work connected with her Ph.D. thesis for Carleton University. I am grateful to Ms. Wogin for taking the time to discuss her work with me. [35] The original charter had specified that the CPR would be exempt from rate regulation only until profits exceeded 10 percent on investment. [36] C. Southey, "The Staples Thesis, Common Property, and Homesteading" Canadian Journal of Economics (1978) 11:547-59. [37] R.T. Dennen, "Some Efficiency Effects of Nineteenth Century Federal Land Policy: A Dynamic Analysis," Agricultural History (1977) 51:71836. [38] Note that the settler comes out earning exactly a normal return in either case. In the first instance the economic rent is fully appropriated by the government while in the second it just covers the loss due to failure to cover opportunity costs in the earlier periods. The settler could conceivably be better off in the former case, though, if the government used this revenue to increase the supply of public goods or to reduce taxes. [39] There could be some additional resource waste due to individuals queuing to earn the chance to appropriate these rents. See Dennen, "Some Efficiency Effects," 729-30. [40] Southey has suggested that a test of his model would be to see whether farming began first on homestead land, then on railway land and finally on free land ("The Staples Thesis," 557, fn. 8). But given that the settlers

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could appropriate the economic rent in the first case, while the land companies would through the purchase price in the others, this would be the predicted order here as well. Thus establishing that this in fact occurred would not necessarily imply that his thesis was valid. [41] It might still be valid as regards the construction of the CPR though. As the literature cited in footnote 4 shows, the company was earning a rate of return below its opportunity costs to at least 1895. This is a necessary condition for the explanation to hold. But given that no other companies were seriously considered by the Macdonald government when it came to issuing the charter in 1880, it is difficult to believe that the mere fact of competition for the land grant forced the CPR to begin construction early. It is more reasonable to conclude that the government wanted the railroad built, prematurely if necessary, for political reasons and that it subsidized the company accordingly. The later railway projects came largely after 1896, so if the reasons given for dismissing the thesis for free homesteads applies it must to these projects as well. [42] J.J. Madden, "Quantitative Economic History—Ten Years On," (mimeograph, 1975).

A Revision of Canadian Economic Growth, 1870-1910 (A Challenge to the Gradualist Interpretation) M. ALTMAN The contemporary view of Canadian manufacturing growth and development during the post-Confederation-pre-World War I era has been shaped by the work of G. Bertram, who constructed estimates of constant dollar gross manufacturing output from which he derived annual growth rates. These growth rates suggest that Canadian manufacturing output increased, impressively, and with some regularity, from 1870 to 1910. This increase challenged, and, some would argue, undermined the view of the old economic history, exemplified in the work of Skelton and Buckley, that Canadian manufacturing realized a sustained take-off only from 1896, following a rather dismal performance from the time of Confederation in 1867. Accordingly, Bertram's data question any strong or significant relationship between a noteworthy and unique spurt in manufacturing growth and development and Canada's wheat boom, which commenced in 1896.1 Although Bertram's work marked an important empirical milestone in an economic analysis of Canada's past, he seriously erred in his calculation of real manufacturing output and, therefore, of corresponding growth rates. Moreover, he did not examine the question of the growth of real manufacturing output per capita and abstracted from the question of the growth of employment in the manufacturing sector. All these factors are relevant to an understanding of manufacturing growth and development; as it stands, the critique of the old economic history must be viewed as incomplete and problematic. In response to Bertram's errors in deriving real gross manufacturing output I present new sets of real gross manufacturing output estimates for the 1870-1910 period, making use of his current dollar estimates for gross manufacturing output but applying different and more accurate deflation procedures. I also construct two sets of real manufacturing value added estimates by deflating the current dollar manufacturing value added estimates recently developed by M.C. Urquhart.2 These real value added estimates are more accurate than can be derived from Bertram's current dollar value added estimates, Source: M. Altman, "A Revision of Canadian Economic Growth, 1870-1910 (A Challenge to the Gradualist Interpretation)," Canadian Journal of Economics (1987) 20:87-113. Excerpt reprinted with permission. See the original for complete tables and notes on their derivation.

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since Urquhart nets out the cost of fuel, power and miscellaneous expenses from his gross output estimates.3 Bertram does not provide us with any estimates for real manufacturing value added, although it is the more accurate proxy for total output as it avoids double-counting. The more accurate real output estimates are used to generate annual growth rates of manufacturing output per capita and per employee engaged in manufacturing. I also present estimates of manufacturing employment. A brief comparison is made with the American record to place Canada in its North American context. Moreover, the real manufacturing value added estimates are used to examine the changing structure of the Canadian manufacturing sector. My aggregate real gross output growth rates differ significantly from Bertram's on a decadal basis, suggesting that the Canadian manufacturing sector grew at a much slower pace than he suggested. This is particularly true of the period 1870-90 upon which Bertram placed so much emphasis. Also contrary to Bertram's views, I find that there was a definite and relative spurt of growth from 1900-10.4 A similar story unfolds from an analysis of my real value added growth rates. These same findings also suggest that stagnation in the growth of real output took place with respect to output per capita and per employee from 1870-1900. There is some evidence to suggest that 1880 to 1890 was a strong decade, at least when compared with the 1870s and 1890s. But I find that the growth of manufacturing employment was respectable in Canada throughout the 1870-1910 period when compared with the United States, except for the 1890s, when the Canadian growth rate fell for the first and only time below the American. I also find that the structure of Canadian manufacturing altered dramatically over the same period, but particularly from 1900 on, in terms of my real value added estimates. This paints a different picture of Canadian manufacturing development from the one drawn from current dollar value added estimates—the approach taken by Bertram and, more recently, by Urquhart. My research suggests that Bertram's optimistic view of Canadian manufacturing growth in its first years should be rejected, while the more pessimistic view put forth by the old economic history should, once again, be given serious analytical consideration. Overall, my findings indicate that there was a clear break in Canadian manufacturing growth and development at the time of Canada's wheat boom; these are consistent with Urquhart's recent conclusions based on his construction of current dollar Canadian gross national product statistics for the 1870-1926 period.5

A Revision of Constant Dollar Manufacturing Output and Growth Estimates Bertram constructed constant dollar estimates for gross manufacturing output by utilizing the general price index numbers provided by the Dominion Bureau of Statistics (DBS), for the five decennial years between 1870 and 1910

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inclusive, to deflate his current dollar estimates for gross manufacturing output. For 1870 and 1880 these index numbers are unweighted and are derived mainly from agricultural commodity prices.6 The 1890, 1900, and 1910 index numbers are weighted, but only in accordance with the distribution of commodities sold wholesale—in 1900 alone—not in accordance with the distribution of commodities produced in the manufacturing sector (see Table 1). A distorted picture of real gross manufacturing output and growth would be generated if the price relatives of the commodities composing the general DBS price index numbers were, on average, significantly different from the price relatives of the commodities which actually constituted manufacturing output. Even in the absence of this possible problem, distortions might arise when the price relatives of the different commodities differ significantly, if the weight of each price relative in the general price index differs substantially from what it should be to reflect each price relative commodity's contribution to manufacturing output. To reduce the probability of such distortions I deflated Bertram's estimates of the current dollar value of gross output for each major manufacturing sector by a deflator specific to that commodity category, as opposed to Bertram's use of a general price index number to deflate the current dollar value of total gross manufacturing output.7 To this end, I used the BBS's wholesale price index numbers for vegetable products; wood, wood products, and paper; fibres, textile products; iron and its products; and chemicals and their products. I also developed price index numbers for the five decennial years from 1870 to 1910 for food and beverages, tobacco and products, leather products, and petroleum and coal products, to supplement the BBS's numbers. These price index numbers were used to deflate the output estimates for the major manufacturing sectors. These constant dollar output estimates were then summed up, yielding estimates of total constant dollar gross manufacturing output (Table 2).8 I also used four base years for my output deflators: 1913, 1890, 1880, and 1900. The last two generated constant dollar estimates for the periods 187090 and 1890-1910, respectively. The 1913 base year is consistent with the BBS's general wholesale price index numbers which Bertram used to deflate his current dollar gross manufacturing output estimates. The BBS general index numbers were originally to a 1935-9 base. And the 1870-1910 segment of the general BBS wholesale price index was made up of two parts: an 187089 segment to a base of 1890 and 1890-1912 segment to base of 1913. The general index numbers of these segments were then shifted by the BBS to a base of 1935-9.9 I shifted the base of the 1870-1910 BBS segment of the general price index to 1913, which changed the value of the index numbers by only a constant. Therefore, using Bertram's method results in identical growth rates, whether a base of 1913 or 1935-9 is chosen. A technical problem emerges, however, when using 1913 as a base year— or 1935-9 for that matter—and deflating current dollar estimates sectorally as

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M. Altman Table 1: Gross (G) Output, Input (I), and Value Added (VA) Price

Classification categories 1. Food & beverages 2. Tobacco & products 3. Rubber products 4. Leather products 5. Textile products 6. Clothing 7. Wood products 8. Paper 9. Printing & publishing 10. Iron & steel 11. Transportation equip. 12. Nonferrous metal 13. Electrical apparatus 14. Nonmetallic mineral 15. Petroleum & coal 16. Chemical products 17. Miscellaneous 18. Weighted general Price index 19. 'Bertram's1 DBS General Price Index 20. Weighted General DBS Price Index

G 99.5 49.5 110.9 59.8 128.7 128.7 40.2 40.2 40.2 146.3 146.3 151.7 — 119.2 105.1 98.2 40.2 72.6

1870 1 108.0 — — 70.9 159.1 — 53.0 53.0 — 116.2 — 118.6 — — — —

VA 71.1 49.5 110.9 49.2 97.3 128.7 29.4 29.1 40.2 194.5 146.3 216.3 — 119.2 105.1 98.2 40.2

G 101.1 60.2 111.0 72.5 116.5 116.5 39.1 39.1 39.1 137.1 137.1 115.7 — 85.6 88.4 95.0 39.1

86.0

59.1

74.4

18SO 1 111.1 — — 95.5 128.3 — 44.1 44.1 — 112.5 — 98.2 — — — —

VA 72.0 60.2 111.0 50.2 98.4 116.5 33.5 32.2 39.1 186.3 137.1 145.9 — 85.6 88.4 95.0 39.1

83.2

61.7

95.7

86.1

79.5

75.5

Source: Standard Industrial Classification Manual, major manufacturing sectors or commodity categories. Table 1 in original paper. Note: See the original paper for notes on derivation.

I do. This can result in growth rates being underestimated, a typical problem that arises when an end-of-period base year is selected. Therefore, in addition to computing constant dollar values using deflators to a base of 1913, I also compute constant dollar values using deflators to a base of 1890. The latter would be recommended by R.E. Gallman, since this base year is at the midpoint of the two limiting years of this study.10 But as a matter of course, the growth rates generated here should be biased downward for the period 1870-90 and inflated for the period 1890-10. I also generate further growth rates by deflating current dollar output estimates with deflators to base years of 1880 and 1900, and, typically, these should yield inflated growth rates for the 1880s

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Canadian Economic Growth Indexes; Base Year = 1913 (Table 1 continued)

G 95.2 71.8 95.5 62.6 95.5 92.5 60.2 60.2 60.2 112.9 112.9 111.2 111.1 88.0 77.3 78.3 60.2 81.7

1890 1 93.3 — — 41.6 111.6 — 72.7 72.7 — 111.3 — 89.8 —

— — —

VA 83.1 71.8 95.5 200.8 85.8 92.5 48.3 45.2 60.2 114.7 112.9 150.6 111.1 88.0 77.3 78.3 60.2

83.1

79.5

1900 G 1 VA 77.7 71.6 125.6 92.9 — 92.9 73.8 — 73.8 70.9 63.5 97.5 83.2 95.9 69.4 83.2 — 83.2 63.5 74.2 51.1 63.5 74.2 52.0 63.5 — 63.5 108.8 108.8 108.8 108.8 — 108.8 104.0 93.3 118.7 104.0 — 104.0 85.5 85.5 79.7 — 79.7 77.4 — 77.4 63.5 — 63.5 78.3

76.6

81.0

1910 G 1 VA 103.3 96.7 134.2 99.9 — 99.9 101.5 — 101.5 83.2 82.0 84.9 96.0 116.7 71.7 96.0 — 96.0 91.5 93.4 88.7 91.5 93.4 88.5 91.5 — 91.5 90.3 91.4 89.3 90.3 — 90.3 89.2 91.0 86.7 89.2 — 89.2 95.2 95.2 92.1 — 92.1 86.5 — 86.5 91.5 — 91.5 93.9

94.1 93.7

80.4

74.8

94.1

81.2

79.2

93.2

and 1900 to 1910 and depressed growth rates for the 1870s and 1890s. Clearly there is no one absolute picture that can be painted of the growth rates of real manufacturing output due to inherent index number problems. But the results presented here allow us to critique Bertram on his own grounds (using the 1913 base year) as well as to reexamine the structure of Canadian manufacturing growth from the added perspective of growth rates general through the use of alternative base years. Using the 1913 base year, my real gross output estimates for 1870 and 1880 are much greater than Bertram's, exceeding his by 31.7 percent and 15.8 percent, respectively (Table 2). For the remaining three census years the two real gross output series are very similar. The differences in output estimates are largely due to my deflating the output in each commodity category by its

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M. Altman Table 2: Gross Output and Value Added in Canadian Manufacturing in Constant Dollars

1870 1880 1890 1900 1. Gross output (general DBS price index) 1913 = 100: 226,150 352,485 563433 770053 2. Gross output (DBSs price indexes) 1913 = 100: 278,349 401,898 556,620 761,580 (707,131) 3. Gross output (DBSs and my price indexes): a) 1913 = 100 297,917 408,155 554,622 738,038 (684397) b) 1890 = 100 227,082 313,638 453,000 618,116 (570,906) c) 1880 = 100 220,991 303,490 462,330 d) 1900 = 100 430,116 576,000 (533,952) 4. Value added (value added price indexes): a) 1913 = 100 130,160 167,932 216,317 247,198 (229,173) b) 1890 = 100 93,381 119,526 171,782 205,743 (189889) c) 1880 = 100 77,249 103,490 172,164 d) 1900 = 100 164,348 200,146 (185535) 5. Value added (gross output price indexes): a) 1913 = 100 107,579 146,367 211,665 252,636 (234215) b) 1890 = 100 79,551 109,673 171,691 209,984 (194023) c) 1880 = 100 76,306 103,490 176,471 d) 1900 = 100 163,334 200,146 (185,535)

1910 1219979 1,231,027 1,220,883 1,075,154 1,015,689 482,131 425,000 409,530 486,679 429,890 411,539

Source: See original paper, Table 4. Note: Bracketed terms refer to the output estimates arrived at using Bertram's estimation technique for 1900.

own deflator, unlike Bertram who simply uses the DBS's general price index numbers. My approach, in effect, is equivalent to deflating the current dollar gross manufacturing output by a price index number weighted for the distribution of output in the manufacturing sector. These weighted index numbers should be compared with those used by Bertram, which are to a base of 1913. The difference between the two, for 1870 and 1880, is significant, but it is important to note that this difference is not entirely due to the weighting procedure. It is also—but in 1870 to only a small extent—due to my replacement of the BBS's index numbers for vegetable and animal products as deflators of

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Table 3: Per Annum Growth Rates of Real Output in Manufacturing (%)

1870 1880 1890 1900 1870 1870 1890 1870 -1880 -1890 -1900 -1910 -1890 -1900 -1910 -1910 1. Gross output (general DBS price index): a) 1913 = 100 4.54 4.80 3.17 4.71 4.67 4.17 3.94 4.30 (2.39) (5.50) 4.67 (3.91) 3.94 4.30 2. Gross output (DBS's and my price indexes): a) 1913 = 100 3.20 3.11 2.90 5.16 3.16 3.07 4.02 3.59 (2.12) (5.96) 3.16 (2.81) 4.02 3.59 b) 1890 = 100 3.28 3.74 3.16 5.69 3.51 3.39 4.42 3.96 (2.34) (6.53) 3.51 (3.12) 4.42 3.96 c) 1880 = 100 3.22 4.30 3.76 d) 1900 = 100 2.96 5.84 4.39 (2.18) (6.64) 4.39 3. Value added (value added price indexes): a) 1913 - 100 2.58 2.56 1.34 6.91 2.56 2.16 4.09 3.32 2.58 2.56 (0.58) (7.72) 2.56 (1.90) 4.09 3.32 b) 1890 = 100 2.48 3.72 1.82 7.52 3.09 2.67 4.63 3.86 2.48 3.72 (1.01) (8.39) 3.09 (2.39) 4.63 3.86 c) 1880 = 100 2.97 5.22 4.09 d) 1900 = 100 1.99 7.42 4.67 (1.22) (8.24) 4.67 4. Value added (gross output price indexes): a) 1913 = 100 3.12 3.76 1.78 6.78 3.44 2.89 4.25 3.84 3.12 3.76 (1.02) (7.59) 3.44 (2.63) 4.25 3.84 b) 1890 = 100 3.26 4.58 2.03 7.43 3.92 3.29 4.70 4.31 3.26 4.58 (1.23) (8.28) 3.92 (3.02) 4.70 4.31 c) 1880 = 100 3.09 5.48 4.28 d) 1900 = 100 2.05 7.47 4.73 (1.26) (8.29) 4.73 5. US value added: 6.17 7.79 4.17 3.57 6.98 6.03 3.87 5.41 Source: Table 5 in original paper. Note: Bracketed terms refer to the growth rates which use the 1900 real output estimates derived through Bertram's estimation technique.

food and beverages, tobacco and products, and leather products with index numbers specific to these commodity categories developed for this study—a more accurate approach. Had I used the DBS's index numbers alone, the weighted average price index numbers would have differed significantly from my own only in 1870, and the weighted average index number for 1870 would still have been much lower than the one used by Bertram: 79.5 compared with 95.7.

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The annual growth rates for real gross manufacturing output (to a base of 1913) generated through my deflation procedure differ considerably from those generated through Bertram's procedure for the period 1870-90: 3.2 percent versus 4.8 percent. In the 1870s the growth rates were 3.2 percent and 4.7 percent, respectively and in the 1880s, 3.1 percent and 4.8 percent, respectively. According to both sets of estimates, the 1890s was an era of slow growth of 2.1 percent and 2.4 per cent, respectively. The 1890s marked a dramatic fall in the growth rate, according to Bertram's estimates, while according to my own, the decline in the growth rate was of much less portent. Both sets of estimates reveal a relatively high rate of growth for the period 1900-10. According to Bertram's estimates this indicates only a return to the high growth rates of the first two decades following Confederation; according to mine, a radical break with the past is revealed (Table 3). My results, therefore, challenge Bertram's conclusion that growth in Canada's manufacturing sector was consistently strong over the period 1870-1910, with the exception of the 1890s. Changing the base year to 1890 or to 1880 and 1900 does not alter these conclusions significantly, except that the 1880s appear relatively stronger, particularly when 1880 is used as the base year. However, growth in the 1880s still remains significantly below that of the period 1900-10. The story told using my real value added estimates is, obviously, of greater significance. I provide two sets of such estimates, all of which are in terms of the series of base years previously discussed with respect to my real gross output estimates (Table 2). One set of estimates is derived by deflating Bertram's current dollar gross output estimates using the above-mentioned deflators and subtracting from the resulting constant dollar estimates my constant dollar estimates for inputs. The latter estimates are derived by first subtracting from Bertram's current dollar estimates of gross output Urquhart's current dollar estimates of value added. The current dollar estimates of inputs are deflated using price index numbers for inputs developed for this study. I use price data in C.W. Bolton, H. Michell, and, to a lesser extent, R.F.J. Barnett, to construct these index numbers.11 Sufficient data were found to develop deflators for inputs of the food and beverages; leather products; textiles; wood, wood products, and paper; iron and steel; and nonferrous metal products commodity categories only. But these categories encompass the major proportion of the manufacturing value added.12 For the rest, inputs are deflated by the same index numbers used to deflate the current dollar estimates of gross output. These constant dollar value added estimates incorporate differences between price index numbers of inputs and outputs. Dividing the current by the constant dollar value added estimates yields my value added price index numbers (Table 1). This approach is taken by R. Gallman to derive American real manufacturing value added estimates for the period 1839-99.13 Further research should make available a larger and more comprehensive sample of price data and, therefore, even more precise constant dollar value added estimates. But

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Table 4: Per Annum Growth Rates of Real Output in Manufacturing (percents) 1870 1880 1890 1900 1870 1870 1891 1870 -1880 -1890 -1900 -1910 -1890 -1900 -1910 -1910 Per capita growth 1. Value added (value added price indexes): a)1913=100 0.98 1.11 0.28 3.93 1.04 0.90 2.07 1.63 (-0.48) (4.74) 1.04 (0.64) 2.07 1.63 b)1890=100 0.88 2.27 0.76 4.54 1.57 1.41 2.61 2.17 (-0.55) (5.41) 1.57 (1.13) 2.61 2.17 c)1880=100 1.37 3.77 2.57 d)1900=100 0.93 4.44 2.64 (0.16) (5.27) 2. Value added (gross output price indexes): a)1913=100 1.52 2.31 0.72 3.80 1.92 1.63 2.23 2.15 (-0.04) (4.61) 1.92 (1.37) 2.23 2.15 b)1890=100 1.66 3.13 0.97 4.45 2.40 2.03 2.68 2.62 (0.17) (5.30) 2.40 (1.76) 2.68 2.62 c)1880=100 1.49 4.05 2.76 d)1900=100 0.99 4.49 2.71 (0.22) (5.31) 2.71 3. US value added: 3.83 5.49 2.24 1.65 4.66 3.84 1.94 3.29 Per employee growth 1. Value added (value added price indexes): a)1913=100 -0.57 -1.02 -0.28 5.01 -0.80 -0.61 2.33 0.76 b)1890=100 -0.66 0.10 0.20 5.65 -0.27 -0.11 2.87 1.30 c)1880=100 -0.17 1.64 0.73 d)1900=100 0.37 5.53 2.91 2. Value added (gross output price indexes): a)1913=100 -0.03 0.18 0.16 4.88 0.88 0.12 2.49 1.28 b)1890=100 0.12 1.00 0.41 5.57 0.56 0.52 2.94 1.54 c)1880=100 -0.05 1.90 0.92 d)1900=100 0.43 5.57 2.97 3. US value added: 3.26 4.86 1.18 0.05 4.06 3.09 0.62 2.32 Source: From original paper, Table 6. Note: Bracketed terms are the growth rates based upon the 1900 employment estimates constructed with Bertram's estimation technique.

it must be noted that this approach has been criticized as laden with potential problems, both theoretical and empirical, which can result in the generation of negative value added estimates.14 Such was not the case in this study. The other set of constant dollar value added estimates is derived by deflating Urquhart's current dollar value added estimates with the price index

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numbers used to deflate the current dollar gross output estimates. It is not yet clear which of the two approaches used to derive real value added estimates is more accurate.15 In this study the growth rates yielded by both deflation techniques permit me to present two sets of growth rates, each of which might encompass the actual path and pattern of Canadian manufacturing value added growth. For the census year 1900 I deflate two current dollar value added estimates. The one taken from Urquhart is consistent with the assumption that the percentage of value added produced by firms employing less than five workers was the same in 1890 and 1900—for 1900 the census provides data on only the larger firms. The other current dollar value added estimate assumes, along with Bertram,16 that the percentage of output produced by the smaller firms declined at a constant rate from 1890 to 1915. Urquhart's value added estimate inflates the current dollar value added and, therefore, constant dollar value added for 1900 by 7.7 percent, unless one assumes that the small firms collapsed in importance from 1900, perhaps as a result of Canada's wheat boom taking on greater force. For this reason, using Urquhart's 1900 current dollar value added estimate, unadjusted, to derive a constant dollar value added estimate for 1900 might result in inflation of the growth rate for the 1890s and underestimation for the period 1900-10. My two sets of real value added estimates are significantly different only for the first two census years when base years of 1913 or 1890 are chosen. The real value added estimates generated using the input-output deflation technique exceed those generated using the gross output deflators alone by between 21.0 percent and 7.4 percent, respectively, in 1870 and 14.7 percent and 9.0 percent, respectively, in 1880 (Table 2). These differences are due largely to the fact that the input deflator for wood products and paper is greater than the corresponding gross output deflators. This difference is reinforced by a similar situation arising in the food and beverages and in the leather products commodity categories. However, the opposite arises in the iron and steel products commodity category, which acts to counter, in part, this reinforcing effect. When deflators to a base of 1880 and 1900 are used, both sets of real value added estimates are similar for all census years.17 The growth rates derived from both sets of real value added estimates tend to corroborate the results drawn from my real gross output estimates. The first set of estimates—derived using the input-output deflation technique— yields consistently lower rates of growth. Also, an inspection of Table 3 reveals that shifting the base year from 1913 through to 1880 and 1900 yields higher growth rates, particularly and most significantly for the 1880s. For a base year of 1913 (this being most consistent with Bertram's estimates) both sets of value added estimates suggest slow growth for the 1870s and 1880s, with even slower growth in the 1890s. The period 1900-10 marks a radical break with

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the past with a growth rate of between 6.8 percent and 7.7 percent, depending on which set of real value added estimates one chooses. If the 1890 base year is assumed, growth for the 1880s is between 3.7 percent and 4.6 percent annually compared with between 2.6 percent and 3.8 percent for a base year of 1913. The 1880 base year yields an even higher rate of growth of about 5.3 percent for this period. It is quite possible, therefore, that there was a spurt of growth in the 1880s which coincided with Canada's government-induced railroad construction boom. But using 1890 and the 1880 and 1900 base years also yields an even higher growth rate for the period 1900-10 of about 8.0 percent. These estimates suggest that the 1880s were relatively strong years in the comparatively depressed three decades following Confederation; and that the 1900-10 period was, once again, a period whose growth performance broke radically with that of the past. Bertram's view of gradual growth over the period 1870-1910 does not hold, whichever base year is chosen to estimate real value added. More pertinent to an understanding of industrial development are my growth estimates of real value added per capita (Table 4). Using real output estimates with a 1913 base year reveals depressed growth in the period 18701900 and a spurt of growth between 1900 and 1910. The 1890s, once again, were the most depressed years by far. The 1880s were characterized by the healthiest growth performance of the period 1870-1900, with growth rates of between 1.1 percent and 2.3 percent. These growth rates were somewhat higher than had been experienced in the 1870s (between 1.0 percent and 1.5 percent annually). If one shifts to the 1890 base year, the growth rate for the 1880s increases to between 2.3 percent and 3.1 percent compared with between 0.9 percent and 1.7 percent for the 1870s and between 4.5 percent and 5.4 percent for the period 1900-10. The 1880 base year yields an even higher growth rate for the 1880s of between 3.8 percent and 4.1 percent. These growth rates must be seen in the context of the rate of population growth, which diminished gradually between the 1870s and the 1890s, from 1.6 percent to 1.1 percent, and then increased to about 3 percent in the period 1900-10 (Table 5). This makes the high rate of per capita growth during this last period that much more impressive. Clearly, two stories can be told from my growth estimates. In one, growth in the 1880s is lower than in the other. Both stories, however, are inconsistent with Bertram's and, compared with the American rates of real per capita value added growth, the Canadian rates appear meagre for all decades except 190010 (Table 4). This is in the light of the American population growing at a significantly faster pace than that of Canada, except for the period 1900-10 (Table 5). My estimates for labour productivity growth, in terms of real manufacturing value added per employee, suggest that the period 1900-10—that decade coloured by the Canadian wheat boom—marked an even more signifi-

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Table 5: Per Annum Population and Employment Growth Rates (%)

1870-80 1880-90 1890-1900

Population Canada USA 1.60 2.34 1.45 2.30 1.06 1.93

1900-10

2.98

1.92

1870-90 1870-1900

1.52 1.26

2.32 2.19

1890-1910 1870-1910

2.02 1.69

1.93 2.12

Manufacturing employment Canada USA 3.14 2.91 3.58 2.93 1.62 2.99 (0.84) 1.90 2.56 (2.68) 3.36 2.92 2.77 2.56 (2.51) 1.76 3.25 2.56 3.09

Total employment Canada USA 3.15 2.86 1.55 2.51 1.04 2.12 4.33

1.98

Source: Table 4 in Gallman, I960, and Historical/Statistics of the United States, 1975.

cant break with the past than my previous estimates would indicate (Table 4), and this holds true no matter which base year is used. If one refers to estimates generated using the 1913 base year, then my two sets of real value added estimates yield either negative or marginally positive growth rates for each of the three decades in the period 1870-1900. In the period 1900-10 the growth rate vaulted to a relatively spectacular 5.0 percent per annum. With the 1890 base year, real labour productivity growth based on my gross output deflators is 1.0 percent for the 1880s, and about 5.6 percent for the period 1900-10. The former is still relatively low, but at least it is an improvement over the even poorer performance of the 1870s. The 1880 and 1900 base years generate growth rates of between 1.6 percent and 1.9 percent for the 1880s, about 5.5 percent for the period 1900-10, and little growth in the 1870s and the 1890s. Different base years still generate different stories, but not significantly so. It remains to be determined whether the significant increase in labour productivity growth in the first decade of the twentieth century was induced by the new and increased demands flowing from the wheat boom.18 It would also be worthwhile to determine if the surge in railway construction of the 1880s was a significant cause for the increase in labour productivity growth in this decade, at least according to the estimates using the 1890 and the 1880 base years. These findings on labour productivity growth make Canada's notable gains in total real manufacturing value added in the period 1870-1900 a product of reasonably high growth rates in manufacturing employment. These were 3.1 percent in the 1870s; 3.6 percent in the 1880s; and between 0.8 per-

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cent and 1.6 percent in the 1890s, depending on whether one uses Bertram's or Urquhart's adjustment techniques for 1900 output (Table 4). Of course, for the 1880s, if one uses the 1890 or the 1880 base years, more substantial total growth is also related to relatively higher labour productivity growth rates. In the period 1900-10 the very high labour productivity growth rate is related to manufacturing employment growing at between 2.7 percent and 1.9 percent annually. But in this last period labour productivity growth contributed significantly to the growth of total output. At least with respect to the growth of manufacturing employment, the period 1900-10 was not characterized by a positive surge in growth relative to the past. Manufacturing employment thus is one variable whose growth history conforms to Bertram's view of the past. Canada's manufacturing employment growth rates were lower than those of the United States in the 1890s and, possibly, in the period 1900-10 (if one assumes that the percentage of manufacturing output produced by small firms collapsed after 1900). In terms of manufacturing employment, growth was healthy even when compared with the American record. But America's real labour productivity growth was significantly higher than the Canadian throughout the period 1870-1900, particularly from 1870 to 1890 (Table 4). But when Canada's real labour productivity growth took off, its American counterpart collapsed. The timing of the changes in American labour productivity growth is the reverse of the Canadian and, statistically, is a product of the fact that real manufacturing value added growth in the United States was significantly less in the period 1900-10 than in the three previous decades (Table 3). These results support J. Dales's argument that Canada's decision to increase tariffs on manufactured commodities was a failure in its inability to cause Canada's performance in manufacturing to catch up to that of the United States.19 Where Canada's manufacturing performance was unambiguously strong in its employment growth, it was so prior to the establishment of higher tariffs in 1878. To the extent that Canada's manufacturing performance improved in the 1880s, it might have been a product of the railroad boom, not the higher tariffs. A hypothesis to be examined is whether the manufacturing performance would have been even tardier without the introduction of acrossthe-board tariff increases.

The Changing Structure of Canadian Manufacturing An examination of the changing structure of Canadian manufacturing from 1870 to 1910 in terms of real manufacturing value added using either the 1913 or 1890 base years (as opposed to the traditional use of current dollar value added estimates) adds further support to the view that the wheat boom marked a turning point in Canadian manufacturing growth and development (Table 6). The current dollar value added estimates suggest that the major

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M. Altman Table 6: Percentage Distribution of Current and Constant Dollar Cur

1. Food & beverages 2. Tobacco & products 3. Rubber products 4. Leather products 5. Textile products 6. Clothing 7. Wood products 8. Paper 9. Printing & publishing 10. Iron & steel 11. Transportation 12. Non-ferrous metals 13. Electrical supplies 14. Non-metallic minerals 15. Petroleum & coal 16. Chemical products 17. Miscellaneous Indust.

14.6 1.3 0.2 12.5 3.5 7.0 21.0 0.9 3.0 16.6 7.7 1.0 0.0 3.1 1.5 2.0 1.4

1870 Con 1913 12.1 1.6 0.1 18.3 2.1 3.2 42.2 1.8 4.4 5.0 3.1 0.3 0.0 1.5 0.8 1.2 2.1

Con 1890 17.2 1.6 0.1 21.1 2.2 4.1 29.2 1.2 3.6 8.2 4.9 0.6 0.0 1.9 0.9 1.3 1.7

Cur

13.9 1.2 0.2 12.4 4.9 9.1 21.4 1.0 3.5 14.9 6.9 1.8 0.0 3.4 1.3 2.3 1.9

1880 Con 1913 12.1 1.2 0.1 15.2 3.1 4.8 39.5 1.9 5.4 4.9 6.0 0.7 0.0 2.4 0.9 1.5 3.0

Con 1890 17.1 1.2 0.2 17.7 3.1 6.4 25.7 1.2 4.6 8.1 4.9 1.6 0.0 3.0 0.9 1.6 2.6

manufacturing sectors retained a similar importance throughout the 1870-1910 period in their contribution to total manufacturing value added. It must be emphasized, however, that this finding is no substitute for that stemming from the current dollar estimates. It only sheds some light on a different side of the coin: dealing with the changing structure of the volume of output produced as opposed to that of value. The nominal output estimates suggest that food and beverages were responsible for about 15 percent of total manufacturing value added from 1870 to 1910. Constant dollar estimates suggest that this sector produced 12.1 percent of the manufacturing value added in 1870 if one uses the 1913 base year and 17.2 percent for the 1890 base year. This sector gradually diminishes in significance by 1910. Leather products experienced a gradual decline according to all estimates. Also, according to all estimates, textiles and clothing increased in importance but only over the period 1870-1900. Wood products experienced a decline in importance according to all estimates. However, according to the constant dollar estimates, wood products contributed 42 percent to the total manufacturing value added in 1870 for a 1913 base year and 29 percent for an 1890 base year, whereas the current dollar estimates suggest a contribution of only 21 percent. For 1900 the first two sets of estimates suggest a contribution of 27 percent and 15 percent, respec-

203

Canadian Economic Growth Manufacturing Value Added (Table 6 continued)

Cur

15.3 1.6 0.3 8.6 5.5 11.2 20.4 1.4 3.4 15.8 6.9 1.9 0.2 3.0 0.6 2.1 1.8

1890 Con 1913 14.6 1.7 0.2 3.4 5.0 9.6 33.5 2.4 4.5 10.9 4.8 1.0 0.2 2.7 0.6 2.1 2.4

Con 1890 15.3 1.6 0.3 8.6 5.5 11.2 20.4 1.4 3.4 15.8 6.9 1.9 0.2 3.0 0.6 2.1 1.8

Cur

16.6 2.0 0.8 7.9 6.4 10.8 17.0 2.4 4.5 14.5 5.4 3.1 0.8 3.2 0.5 2.3 1.9

1900 Con 1913 10.8 1.8 0.9 6.6 7.5 10.6 27.1 3.7 5.7 10.9 3.1 2.1 0.6 3.0 0.5 2.4 2.4

Con 1890 14.2 1.5 0.9 10.9 7.0 12.1 14.8 2.1 4.1 14.8 5.4 3.6 0.8 3.2 0.5 2.2 1.7

Cur

14.3 1.9 1.0 5.9 4.0 11.2 16.0 2.7 3.5 16.8 6.9 5.4 1.6 3.8 0.5 2.9 1.7

1910 Con 1913 9.9 1.8 0.9 6.5 5.2 10.9 16.9 2.9 3.6 17.6 7.2 5.8 1.7 3.7 0.5 3.1 1.8

Con 1890 11.9 1.5 1.0 7.0 4.2 11.7 8.2 1.3 2.5 23.2 9.4 9.4 0.4 3.8 0.5 2.8 1.2

tively for this sector, and about 17 percent for the current dollar estimates. By 1910 my constant dollar estimates suggest that wood products comprised 17 percent and 8 percent respectively of manufacturing value added, while the current dollar estimates indicate little change from 1900. My constant dollar estimates clearly suggest a dramatic fall in the importance of wood products from 1900 to 1910, contrary to what is implied by the current dollar estimates. For both the iron and steel products and transportation equipment sectors the current dollar estimates imply that there was little change in their relative importance from 1870 to 1910, with these sectors producing about 15 percent and 7 percent respectively of the total manufacturing value added. But, according to the constant dollar estimates there was a marked increase in the importance of iron and steel products during the 1880s and, more particularly, during the period 1900-10, from between 10.9 percent and 14.8 percent in 1900 to between 17.6 percent and 23.2 percent in 1910 of the total manufacturing value added. The transportation sector also experienced a dramatic increase in importance, but over the period 1900-10 alone, from between 3.1 percent and 5.4 percent to between 7.2 percent and 9.4 percent of the total manufacturing value added.20 The current dollar estimates also suggest that the share of chemical products in the total manufacturing value added changed little over the period

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M. Altman

1870-1910, with the exception of an increase from 2.3 percent to 2.9 percent from 1900 to 1910. The constant dollar estimates, however, indicate that chemical products became increasingly significant from 1870 to 1910, with their share of total manufacturing value added increasing from about 1.2 percent to about 3.0 percent. Both current and constant dollar estimates suggest that the share of nonferrous metal products and electrical apparatus and supplies rose most significantly from 1900 to 1910. During the first decade of the twentieth century a structural change took place in Canadian manufacturing. This cannot be clearly deduced from an examination of current dollar manufacturing output estimates. The high growth rates for real manufacturing output, which my deflation procedures reveal for the period 1900-10, encompass the rise to prominence of key sectors. This break with the past, coinciding with the wheat boom, lends support to the view of the old economic history as to the significance of that boom. Nevertheless, my findings in no way demonstrate any causal relationship, but are merely suggestive. It is also clear that important changes were taking place during the 1880s, although these were not as sharp as those experienced in the period 1900-10.

Conclusion My real output estimates paint two different pictures of Canadian manufacturing growth and development, both of which challenge the gradualist interpretation put forth by G. Bertram. The only finding of Bertram's which is supported by my estimates is that substantial extensive manufacturing growth took place prior to the wheat boom, dating at least from Confederation. If a base year of 1913 is chosen for my price indexes, the extensive growth in the period 1870-1900 was in the context of slow or negative growth in per capita output and labour productivity. Using the 1890 and, particularly, the 1880 and 1900 base years yields higher growth rates for the 1880s, suggesting that manufacturing performance in the period 1870-1900 was poor, with the exception of one decade. But this would be unambiguously true only for the growth in output per capita. All my real output estimates clearly reveal a radical break with the past from 1900. What remains to be explained in a rigorous fashion is why the era of the wheat boom marked such an important period of change in the Canadian economy.

Notes [I] The high rates of real gross value of manufacturing output of the 1870s through the 1890s appear to conflict with the generally accepted opinion

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[2]

[3] [4]

[5]

205

that these decades had failed to fulfil the promise of economic expansion provided by Confederation (G.W. Bertram, "Historical Statistics on Growth and Structure of Manufacturing in Canada, 1870-1957," J. Henripin and A. Asimakoupulos, eds., Conference on Statistics, 1962 and 1963, Papers (Toronto, 1964) 96, 98, 139). Moreover Bertram emphasizes that his estimates demonstrate that there was no sharp break in Canadian manufacturing development from 1900 (G.W. Bertram, "Economic Growth in Canadian Industry, 1870-1915: The Staple Model and the Take-off Hypothesis," Canadian Journal of Economics and Political -Science [1965] 29:159-84). Refer also to O.D. Skelton, "General Economic History, 1867-1912," eds. A. Shortt and G. Doughty, Canada and Its Provinces, 9 (Toronto, 1914) and K.H.A. Buckley, Capital Formation in Canada, 1896-1930 (Toronto, 1974). M.C. Urquhart, "New Estimates of Gross National Product, Canada 1870 to 1926: Some Implications for Canadian Development." discussion paper no. 586, Department of Economics, Queen's University (1985). Urquhart's (Ibid.) value added estimates are about 82.5 percent of Bertram's except for 1900. Bertram, "Historical Statistics," 96, 139; and "Economic Growth," 17071. Bertram ("Economic Growth," 172, 184) does not deny that the period 1900-10 was one of vigorous growth, but only that this growth did not mark any significant break with the past. McDougall makes a similar argument relying entirely upon current dollar output estimates. (D.M. McDougall, "Canadian Manufacturing Commodity Output, 18701915," Canadian Journal of Economics [1971] 4:21-36.) He also makes very rough "guesstimates" of manufacturing output per capita. After this manuscript was completed, M.C. Urquhart made available to me a mimeograph by R.F.J. Barnett ("Canada's Manufacturing Development and Foreign Trade" [Department of Economics, Bishop's University, 1966]), whose growth estimates for real manufacturing value added are similar to mine when an 1880 or 1890 base year is used although our methodologies differ. Bertram, "Economic Growth," 176-7; and Urquhart, "New Estimates," 21, 25, 27-28, 114.

[6] A. Asimakoupulos. "Price Indexes," in M.C. Urquhart and K.A.H. Buckley eds., Historical Statistics of Canada (Toronto, 1965). [7] Urquhart's ("New Estimates") recently reestimated current dollar values of gross manufacturing output are almost identical to Bertram's for every decennial year between 1870 and 1910 inclusive, except for 1900, where the difference is marginal. Urquhart does not detail his estimation procedure, but his 1900 gross output estimate ($549,894,000) falls between Bertram's estimate, built upon the assumption that the percentage of to-

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tal output produced by firms with fewer than five employees declined at a constant pace from 1890 to 1915 ($534,600,000), and that based upon the assumption that the percentage of total output produced by these firms remained the same in 1890 and 1900 ($575,794,000). See Bertram ("Historical Statistics," 98, 99 notes). The 1900 census provides data only on firms employing five or more employees. [8] It must be noted that the censuses provide data only for decennial years. Urquhart interpolates output figures for the interdecennial years. My growth estimates are based upon the decennial output data alone. Thus, if these are taken from significantly different segments of the trade cycle, my growth rates would distort the true values. Bertram ("Historical Statistics," 136), after an analysis of the cycle literature, concludes that the decennial years of 1870 through 1900 all appear to occur in a prosperity phase of the cycle. E.J. Chambers, "Late Nineteenth Century Business Cycles in Canada," Canadian Journal of Economics and Political Science (1966) 30:391-413 comes to a similar conclusion for the period 1867-1953. [9] Asimakoupulos, "Price Indexes," 283. [10] R.E. Gallman, "The United States Commodity Output, 1839-1899," Trends in the American Economy in the Nineteenth Century, Studies in Income and Wealth (New York, 1960) 24:13-72, 47, 49. [11] C.W. Bolton ed., Wholesale Prices in Canada, 1915 (Ottawa, 1916); H. Michell, "A survey of prices in Canada from 1848," Statistical Contributions to Canadian Economic History, vol. 2 (Toronto, 1931); R.F.J. Barnett, "A Study of Price Movements and the Cost of Living in Kingston, Ontario for the Years 1865 to 1900" (MA diss., Department of Economics, Queen's University, 1963). The author thanks M.C. Urquhart for making this document available to him. [12] These commodity categories comprise 72.8 percent of total current dollar manufacturing value added in 1870; 71.3 percent in 1880; 68.9 percent in 1890; 67.9 percent in 1900; and 65,1 percent in 1910. [13] Gallman, 1960, 56. [14] P.A. David "The Deflation of Value Added," Review of Economics and Statistics (1962) 48:148-55. [15] This approach is recommended by David, "Measuring Real Net Output: A Proposed Index," Review of Economics and Statistics (1966) 52:419-25. But although this procedure avoids the problems which might flow from using value added deflators, it cannot take into account different relevant and relative price movements for inputs and outputs. Arrow suggests that one should estimate real value added using a production function (K. J. Arrow, "The measurement of real value added," Nations and Households in

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[16] [17]

[18]

[19] [20]

207

Economic Growth P.A. David and M.W. Reder ed., [New York and London, 1974]). But this method poses certain possible problems, particularly with respect to historical data, but also with respect to determining the price of factor inputs and integrating the extent of technical change in estimating real value added. Bertram, "Historical Statistics," 99 n. 5. In 1870 the difference in the two value added estimates amounted to $22,750,000. Wood products contributed $14,833,000 to this total, while food and beverages contributed $4,519,000 and leather products $4,239,000. In 1880 the difference in the two value added estimates, came to $21,567,000 of which wood products contributed $9,481,000, and food $4,850,000. E.J. Chambers and D.F. Gordon argue that this relationship cannot be a causal one, since productivity growth is assumed to be given exogenously ("Primary Products and Economic Growth: an Empirical Measurement," Journal of Political Economy [1966] 74:319, 327, 328.). However, this is not proven. It is only asserted. J. Dales, "Some Historical and Theoretical Comments on Canada's National Policies," Queen's Quarterly (1963) 71:303, 308, 311. Bertram ("Economic Growth," 181-2), relates to us the relatively high rates of growth of real gross output in the iron and steel products and transportation equipment sectors in the period 1900-10 compared with the period 1870-90. Bertram attributes little significance to this finding. Rather, he focusses upon the significance of these two sectors in the pre1900 period.

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Part Four

Growth and Stagnation in the Twentieth Century

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Capital Formation in Canada, 1896-1930 K.A.H. BUCKLEY The production of wheat on the Canadian Prairies provided the basic economic opportunity in the economic development of Canada from 1896 to 1930. This opportunity attracted labour and capital to the direct exploitation of virgin land resources and induced investment throughout the economy in major secondary and tertiary industries and, through these, in housing and other community facilities greater by many times than the investment on the agricultural frontier itself. This leverage effect, the most significant aspect of the frontier, was a determining factor in the development of Canada's economic structure and, to a large extent, of its political structure as well. Political and economic behaviour was influenced by the Prairies, even in advance of their emergence as a wheat economy, through anticipations of their impact. Other factors, such as the past experience and failures of the isolated colonies in British North America, the availability of capital funds, the pattern of American experience, and, especially the geography of the country, were important in the development; but the crucial determinant was the opportunity anticipated and finally realized on the prairie frontier. The British colonies in North America were joined in political union by the British North America Act, 1867, but it was not until after the turn of the century that a significant degree of economic integration was achieved. Meanwhile the powerful anticipations underlying Confederation determined the policies of the new federal government. The nature of these anticipations was frequently expressed: "Coming further east still, let us but have our canal system completed, our connection with the Pacific Railway at the head of Lake Superior, the Northwest becoming rapidly settled, the exports of the settlers passing through our canals and the whole system of the Ontario railways complete, and the result will be that the trade of the city of Toronto which has doubled in five years will be quadrupled, and the case will be the same with Hamilton, London, and other cities in the West [Ontario]. Such will be the direct and indirect results of these facilities. . . . "l The potential frontier, Rupert's Land and the Northwest Territories, was acquired with imperial aid in 1870. The Intercolonial Railway to the Maritimes was completed in 1876 and the Canadian Pacific Railway, from Montreal to the west coast, in 1885. The national policy of protective tariffs was introduced in 1879 to promote industrialization and, along with the uneconomic, all-Canadian transportation system, to ensure that the impact of the leverage effects of the new frontier be Source: K.A.H. Buckley, Capital Formation in Canada, 1896-1930 (Toronto, 1955), 4-12. Minor deletions in the original text have been made. Reprinted by permission of the publishers.

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contained, so far as possible, within the territorial bounds of the new political unit. In the difficult physical environment of British North America, the essential capital formation needed to bring potential resources within the scope of the market passed beyond private means in the early part of the nineteenth century, as durable structures replaced inventories as the major component in the structure of productive capital. Governments were compelled to assume an active role in the investment field and the fulfillment of this role became their major function. A comparison of the period from the mid-1870s to the mid18908 in Canada with the periods before and after reveals marked contrasts in the efficacy of government intervention in the field of investment. In the three periods governments supported the extension of railways, canals, roads, and other transportation equipment. In the earlier and in the later period, that is from 1840 to about 1870, and 1900 to 1930, large external economies were apparently created by these government activities and large-scale booms induced. In both periods basic opportunities were present in the form of an accessible agricultural frontier. Actual resources were linked to markets by the new equipment, and these resources attracted a large inflow of settlers whose pioneer efforts eventually converted wilderness into prosperous settlement. Secondary opportunities flowed from the basic production: trade and local manufacturing grew to supply the growing production and consumption needs of the pioneer, and other marketing facilities were further improved to market the pioneer's surplus products; the demands of the people exploiting these secondary opportunities provided the new opportunities to be exploited by others at third and fourth remove from the initial development, and so on. Prom about 1870 to 1895, government efforts were on a larger scale than in the earlier period (1840 to 1870), but the repercussions were brief interruptions in a secular depression extending over twenty-five years. Explosive building and real estate booms were induced, but these were not general, and had a very short life in those localities where they did occur. The absence of basic opportunities in this period accounts for the disappointing results of government action on a large scale. The whole effect, during the period, was virtually limited to the initial impact of each government act. The prairie frontier finally passed the critical margin separating potential from actual resources when the opportunity it afforded became definitely superior to alternative opportunities open to migrants. This shift in the character of the frontier occurred quite suddenly, in the mid-1890s. The determination of the timing of this major turning point in Canadian economic development has been attributed to many factors. . . . Two factors were fundamental. The interior of the continent is a single, continuous plain and the movement into western Canada was a natural extension of the American frontier after the occupation of more accessible free land in the United States. This natural movement of population was accelerated by a sharp upturn in the price of

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Figure 1: Real exports per capita and the terms of trade, 1870-1930. (Source: Taylor and Mitchell, Statistical Contributions and Dominion Bureau of Statistics.)

wheat in the mid-1890s. At the outset investment was largely the expenditure of personal effort and savings upon opportunities recognized by those close at hand. Most of the first arrivals on the frontier were North Americans. Their expenditures embodied knowledge gained from experience in a similar environment. Outside capital was not attracted on a significant scale until the boom was well under way. At the turn of the century, from 1896 to 1901-2, the United Kingdom was experiencing an investment boom on a scale that provided ample domestic opportunities for labour and capital and at the same time affected favourably, from Canada's point of view, the price of wheat.2 When the domestic cycle in the United Kingdom had run its course, and after the nature of new frontier opportunities in Canada had been thoroughly demonstrated and the rising trend in the economic activity of the Dominion was well advanced, the flow of British labour and capital to Canada began.

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The sudden shift in real opportunity in Canada is reflected in the real exports per capita (Figure 1). The rate of Canada's economic growth has varied with the availability of virgin resources and the relative ease of converting these into cash sales in the world markets. Expanding exports of primary commodities were the means of acquiring manufactures essential to the further expansion of domestic production and consumption, and they generated the profits necessary to attract and service foreign investment. Only when conditions conducive to the expansion of the rate of exports prevailed, could the expansion of the productive capacity of the country, in terms of its capital, human, and natural resources, proceed over an extended period beyond the rate fixed by domestic savings and domestic population growth. In their relation to exports, natural resources were the lever inducing rapid growth in the other (human and capital) dimensions of productive capacity. Real exports per capita followed a flat trend from 1875 to 1896 and then began to rise.3 This shift in trend after 1896 indicates an expansion in opportunities that accelerated for some time at a faster rate than the spectacular growth of population which it induced. The change took place before the flow of foreign capital began and was, in fact, a cause of that flow. The terms of trade over the years when the shift in opportunity occurred reflect favourable price trends which served to reinforce the change in real opportunity. But the terms of trade, like the cheapening of transportation and the decline in interest rates, had been more or less steadily improving Canada's position since the 1870s and, like them, was a contributing rather than a causal factor in the turning point.4 Variations in the rate of growth of population in a new country like Canada were largely the net product of movements into and out of the country.5 Whatever may be the explanation of the worldwide migrations that occurred, the experience of each new country was determined to a large extent by the nature of the economic opportunities available for individual migrants relative to opportunities available among its competitors in the field of immigration. In Canada, from 1870 to the mid-1890s, these opportunities were directly related to government actions of various kinds, and their short-lived character was reflected in the flows of immigrants and emigrants during the period. In spite of large numbers of arrivals in the decades from 1870 to 1900, net migration was negative in each. After the change in the opportunities in 1896, net migration became positive and contributed almost 40 percent of the 100 percent increase in the population that occurred in the following thirty-five years.6 The rate of expansion of the capital equipment of the country which occurred from 1901 to 1930 is shown in Table 1. Global estimates of domestic capital formation per capita expressed as annual averages for each quinquennium are shown in the first column. Reducing the expenditures to a per capita basis brings out the high rates of investment activity achieved before 1915 during the period of the first heavy movement of population into the West.

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The true intensity of the process in this period is masked by the upward drift in prices. An indication of the bias introduced by price changes may be seen in columns 2 and 3 of the table, where the annual average gross investment in structures—the largest of the three major components of domestic capital formation—is shown in current and constant prices. The highest rate was achieved from 1911 to 1915. During this period the all-time peak, that of 1912-13, sustained the average despite the sharp recession and depression of 1914-15. The average for the preceding quinquennium was almost as high because annual expenditures, although lower than those later achieved, were better maintained. A mild depression in 1908 had little effect on construction. The rate during the war and postwar boom compared favourably with that of the following period of agricultural depression and was not a great deal lower than the rate from 1926 to 1930 when the final large-scale movement into the West occurred. Direct investment on prairie farms absorbed large absolute expenditures. The size of these and their relation to gross domestic capital formation from 1900 to 1930 are shown in the first three columns of Table 2. Table 1: Gross Domestic Capital Formation and Gross Construction, 1901-30 (expressed as annual averages per capita).

1901-05 1906-10 1911-15 1916-20 1921-25 1926-30

1 Gross domestic capital formation (current dollars) 45 70 86 98 81 119

2

3

Gross construction (current dollars) (constant dollars) 24 33 44 51 53 55 52 35 50 30 63 39

It is apparent from the last four columns of Table 2, which show the absolute and relative size of investment in transportation, that railway investment did not reach the same level of intensity as prairie farm investment until after 1905. The lag is suggestive. Following the initial burst of activity in the West, investment in the railway's rose to a remarkable level and high rates of investment were maintained until 1915. After 1915 a downward trend set in. Investment in other transportation facilities—such as canals, harbours, highways, and bridges, trucks and automobiles for business use—continued to grow as a result of the development of the automobile. However, this growth was not great enough to offset the decline in railway expansion. The relative im-

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Table 2: Prairie Farm and Transport Investment Compared with Gross Domestic Capital Formation (millions)

1901-5 1906-10 1911-15 1916-20 1921-25 1926-30

1 Gross domestic capital formation 1,283 2,287 3,279 4,033 3,641 5,831

2 Prairie farm investment* 221 319 463 370 245 454

3 Percentage 2 is of 1 17.2 13.9 14.1 9.2 6.7 7.8

4

5

6

7 Percentage Transport investment 6 is Railway Other Total of 1 165 36 201 15.7 473 66 539 23.6 682 166 848 25.9 423 238 661 16.4 386 367 753 20.7 583 642 1,225 21.0

Source: see original, Appendix tables H,J. and K, and Chapter XI. * Including buildings, equipment, trucks, inventories, but excluding passenger cars.

portance of the whole transportation group declined after 1915. Prairie farm investment was at its relative peak from 1901 to 1905 (column 3), continued at a slightly lower level until 1915, and then declined. Relatively speaking, transportation rose after 1905 (column 7), remained at remarkable levels until 1915, then declined. The expansion of the railways was directly related to wheat. The Prairies offered little resistance to the construction of the network of lines. Mileage grew from 3,300 in 1897 to 4,000 in 1901, 6,000 in 1906, 8,000 in 1911, and 14,000 in 1916. In the postwar years when railway construction was minimal elsewhere in the Dominion, the construction of branch lines continued on the Prairies, raising the total mileage to nearly 18,000 by 1929. This construction would have been induced in the normal course of events. But unfortunately prairie expansion also induced the construction of two complete transcontinental systems and these, built like the Canadian Pacific Railway within the framework of national policy, traversed the barren wilderness of the Canadian Shield at very great cost. Early prairie roads were mere trails following the square pattern laid down by the survey system, sufficient for the moving of grain to loading platforms and elevators along the railroad and of supplies from the villages back to the farms; but the automobile revolutionized local demands, not only on the Prairies but throughout the country, and as a result road construction became a major field of investment. Had the expanding export region exchanged the proceeds of its sales directly for imports, as it would largely have done in the absence of a nation-

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ally planned transportation system and tariff, the economic prosperity of the eastern provinces would have been dependent on local developments. But the expenditures of the new region were channelled east, and protected manufacturing industries expanded greatly to meet the demands. British Columbia, to the west, redirected its lumber products from exports to the prairie market, which absorbed up to 70 percent of the total. The Maritime Provinces far to the east, shared in the boom as long as the extensive phase of railway construction which accompanied prairie expansion persisted on a national scale. Its iron and steel industry was unable to compete effectively with firms located in the central provinces when the peak demands for railway equipment subsided. The central provinces were then chief beneficiaries of national policy. Capital invested in their manufacturing industries increased from $357 million in 1900 to $4,091 million at the peak in 1929. The greatest relative expansion occurred in iron and steel and textiles under a tariff designed to give maximum protection to finished goods, with the materials, equipment, and other items affecting the costs of production of the finished commodities entering free or at a nominal duty.7 The concentration of production of manufactured goods in the central provinces and its distribution between Ontario and Quebec are indicated in Table 3. The selected items shown cover about one-third of the national production, and the geographical pattern reflected is representative of the total. Opportunities for capital and labour in manufacturing were considerable, but the most spectacular increase in opportunities came in the tertiary industries. Transportation has already been mentioned. The high degree of capital intensity in the transportation industry and the geographical extent of the country implied very large investment outlays. Apart from certain other utilities, the degree of capital intensity among the remaining service industries was relatively low; but in absolute and relative terms the largest job opportunities were opened up in these service fields. The total labour force increased by 120.2 percent from 1901 to 1931. The farm labour force increased by only 57.9 percent. (The process of mechanization in agriculture was relevant here.) Other primary occupations increased by 113 percent. The labour force in manufacturing rose by 65 per cent, and in construction 128.1 percent. Thus primary plus secondary occupations increased by less than the national average. A 218 percent increase (on the average) occurred among workers reporting the following occupations: transportation (252 percent), trade (253 percent), clerical (339 percent), other service (161.4 percent).8 It is apparent that the expansion of job opportunities in the service industries contributed more than other industrial fields to the expansion of nonfarm population and, through the accompanying process of urbanization, to the demand for housing—the largest single component of the volume of construction—and to roads, streets, sidewalks, schools, hospitals, public utilities, and other community facilities. The importance of this relation of the service industries to the expansion and

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K.A.H. Buckley Table 3: National Manufacturing Output in the Central Provinces in 1929.

Industrial group Automobiles Rubber tires Machinery Castings and forgings Railway rolling stock Hardware and tools Agricultural implements Cotton yarn and cloth Boots and shoes Rubber footwear Clothing, men's Clothing, women's Hosiery and knit goods Electrical apparatus and supplies

Net national production (percent) 1 2 3 Ontario Quebec 1+2 96 — 96 95 4 99 72 25 97 69 21 90 23 53 76 68 29 97 95 3 98 18 75 93 36 60 96 38 62 100 36 61 97 56 40 96 72 22 94 77 22 99

Source: Amended from W.A. Mackintosh, Economic Background of Dominion-Provincial Relations, Carleton Library ed. (Ottawa, 1964), 97.

pattern of investment expenditures is sometimes overlooked. Table 4 compares the investment in railway structures in value and percentage terms with the investment in housing. The value of direct government construction (excluding railway construction) is also shown in the table. In the whole field of construction during the period under review, housing was the only component to rival transportation in fundamental importance and to surpass it in size. In absolute value terms, investment in residential housing over the whole period was almost as large as the total investment in all transport structures and equipment (see Table 2). In addition, the relative stability of the housing component, reflected in column 5 of the Table 4, contrasts markedly with the railway component. The latter rose from 18.2 percent of gross construction in 1901-5 to over 26 percent in 1906-10 and 1911-15, and then fell off to average about 12 percent of gross construction in the following three quinquennia. Meanwhile housing was fairly close to 30 percent of gross construction in each quinquennium. The relation between tertiary occupations and basic production in western Canada was obvious and direct. The bulky character of wheat held the producing units within a short road haul of the railways.9 Stations were erected at intervals of approximately eight miles along the track,10 and around these

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Table 4: Major Components of Gross Construction, 1901-30 ($ millions)

1901-5 1906-10 1911-15 1916-20 1921-25 1926-30

1

2

Gross constr. 681 1,439 2,007 2,122 2,271 3,109

Railway constr. 124 381 537 253 253 389

3 % 2 is of 1 18.2 26.5 26.8 11.9 11.1 12.5

4 Housing constr. 222 468 568 641 742 1,060

5 % 4 is of 1 32.6 32.5 28.3 30.2 32.7 34.1

6 Govt. constr. 79 149 342 256 436 578

Source: See original, Appendix tables B, J, L and N Note: Direct railway construction by the federal government is included in column 2 and excluded from column 6. The total federal railway investments for the six quinquennia in millions of dollars were: 15, 99, 98, 36, 3, 24.

clustered the local distribution agencies adapted to the needs of the prairie wheat economy. Three to six grain elevators, a loading platform, and, at some points, a small stockyard lined the track.11 Terminal elevators were built at Fort William and Port Arthur at the head of Lake Superior at an early date. The bulk of the grain was moved by water to lower lake terminals and then to New York by the Erie Barge Canal or to Montreal. A small capacity was provided on the Canadian Atlantic seaboard to handle winter shipments. Interior terminals were built on the Prairies, after 1912. Pacific terminals were built following the completion of the Panama Canal.12 The high degree of specialization of prairie agriculture and the character of local resources implied dependence on primary and secondary producers in other regions and an extensive marketing structure to facilitate supply. In addition to the assemblers each small market centre supported a variety of merchandising and service establishments, professional people, and financial institutions.13 The cities that emerged in the three Prairie provinces displayed the same general pattern as the towns and villages with the addition of many wholesale institutions and, substituting for the country general store, a somewhat more-specialized structure of retail outlets. In short, the cities, towns, and villages were centres of tertiary producers. Among secondary producers, building and construction workers were most numerous, with manufacturing virtually limited to processing of farm products, particularly the production of flour. Winnipeg became the wholesale centre for the Prairie Provinces and was the only large city in the West until the opening of the Panama Canal en-

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220

larged Vancouver's opportunities. But Winnipeg was subsidiary to Montreal and Toronto. The two western cities became national metropolitan centres with the whole economy shared as a hinterland between them. The concentration of the wholesale trade of Canada was reflected in the first full census of merchandising, which was taken in 1931: 69.7 percent of all wholesale sales in Canada in 1930 were made in the four largest cities, with 23.1 percent in Montreal, 20.1 per cent in Toronto, 19.1 percent in Winnipeg, and 6.4 percent in Vancouver. Head offices of national wholesalers, of large department and chain store retailers, and of the various financial services were concentrated in Montreal and Toronto. The two cities also attracted manufacturing industries with the result that a large part of the secondary industries was located within or near their boundaries. The rapid growth of these and other urban centres in Canada from 1896 to 1915 was largely the result of prairie expansion. The accident of war, which added a stimulus of its own, the gradual emergence of important new staple exports, and the substitution of capital for labour in agriculture were among the major factors contributing to urban growth after 1915 Table 5: Domestic Investment, Foreign Investment, and Gross National Product, 1901-30 ($ millions) 1

1901-5 1906-10 1911-15 1916-20 1921-25 1926-30

Gross national product 5,650 8,482 12,178 20,923 22,589 28,758

2 Gross domestic capital formation 1,283 2,287 3,279 4,033 3,641 5,831

3 Foreign investment -301 -784 -1,515 -262 72 -563

4 Gross Investment (2 -f 3) 982 1,503 1,764 3,771 3,713 5,268

5 % 4 is of 1 22.7 27.0 26.9 19.3 16.1 20.3

6 % 4 is of 1 17.4 17.7 14.5 18.0 16.4 18.3

Source: see original, Appendix tables H and I.

Table 5 emphasizes in a different way the investment opportunities that accompanied the opening of the Canadian West. Here gross capital formation and gross investment are compared with the gross national product. The aggregates are shown in millions of dollars for each quinquennium from 1900 to 1930. In the final two columns of the table gross domestic capital formation and gross investment are expressed as percentages of gross national product. Gross domestic capital formation exceeded 25 percent of the gross national product from 1901 to 1915. An average of almost 27 percent was maintained from

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1906 to 1915. The 26.9 percent average for the years from 1911 to 1915, which include two years of recession, suggests the unusual levels attained in the peak years, 1911-13. The average dropped off to 19.3 percent from 1916 to 1920, reached a low for the thirty-year period of 16.1 percent from 1921 to 1925, and recovered to 20.3 percent after 1926. The remarkably high levels of domestic capital formation before 1915 were made possible by large inflows of British and foreign capital funds. The inflows of British and foreign funds are shown in column 3. Adding these algebraically to gross domestic capital formation yields the gross investment shown in column 4. The importance for foreign savings varied considerably over the period. They were relatively more important before 1915 than after and also absolutely more important from 1905 to 1915 than from 1926 to 1930. Only in the depressed period from 1921 to 1925 were they not a factor at all. An approximation of the relative importance of gross domestic savings appears in column 6, where gross investment is expressed as a percentage of gross national product. Direct government investment would have to be deducted from gross investment and the residual adjusted for the net surplus or deficit of governments to obtain a conceptually accurate measure of domestic savings offsets. . . .

Notes [1] Prom a typical budget speech in the early seventies, in which the minister is justifying federal investment expenditures on canals and railway. (Quoted by W.A. Mackintosh, The Economic Background of DominionProvincial Relations (Ottawa, 1939), 16; reprinted in the Carleton Library (Toronto, 1964), 25. [2] In 1900 and 1901, gross home investment in the United Kingdom reached the highest levels achieved from 1870 to 1913. This boom even attracted foreign, particularly American, capital to the United Kingdom in the finance of the London underground railway system. (See A. Cairncross, "Home and Foreign Investment in Great Britain, 1870-1913," [Ph.D. Doctoral thesis, Cambridge University], 246-47 and Table 21). [3] The pattern of Canadian economic experience appears to conform with Schumpeter's scheme, wherein the second long "KondratiefP cycle from 1843 to 1897 reaches a peak about 1870. (J.A. Schumpeter, Business Cycles [New York, 1939].) Because of the importance of international prices and price trends to a simple staple-producing and exporting economy and the fact that Kondratieff derived the shape of his cycles from data heavily weighted by prices, this conformity is not surprising. However, the relative secular stagnation in Canada from the seventies to the nineties was not the product of any rhythm in general international business activity, but

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of a closed frontier in the East and the absence of resources in the West. The relative flatness in the trend in Canadian activity from the seventies to the nineties, reflects the status of the Prairies in those years when they, like other parts of the continental plain before they became resources, were vacant. [4] See W.A. Mackintosh, Economic Problems of the Prairie Provinces (Toronto, 1935), ch. 1, for trends in transportation costs and the cost of borrowing through this period. [5] Birth and mortality rates have played an important role, and in recent years the principal role, in determining the rate of growth of Canada's population, but in the period from 1870 to 1930 migration was chiefly responsible for the wide variations in the decade rates. [6] The population increased from 5.4 million in 1901 to 10.4 million in 1931. Net migration in this period was 1,928,000. (Cf., Monthly Review, Bank of Nova Scotia, July 1954.) [7] W.A. Mackintosh, Economic Background of Dominion-Provincial Relations (Toronto, 1964) (Carleton Library ed.) (Ottawa 1939), 49-51. [8] If unskilled workers not allocated were all treated as manufacturing, the increase in manufacturing would still be lower than the national average. Actually these unallocated workers were working in construction and transportation as well as in manufacturing. (Cf., Dominion Bureau of Statistics Census Bulletin, No. 0-6, Occupations and Industries [Ottawa, 1944].) [9] V.C. Fowke, "The Distributive Pattern in the Prairie Provinces," The Commerce Journal (1945) 70. [10] Ibid., 71. [11] The capacity of country elevators increased from 12.8 million bushels in 1900 to 192.9 million bushels in 1930. The cost of constructing these elevators at 1930 prices would exceed $70 million, with no allowance for those destroyed or demolished during the period. Capacities are from Canada Year Book and unit costs from D.A. MacGibbon, The Canadian Grain Trader (Toronto, 1932), 93. [12] Terminal capacity increased from 5.6 million bushels in 1900 to 201.7 million bushels in 1930. [13] Cf., Fowke, "The Distributive Pattern in the Prairie Provinces," for a description of the institutional pattern of the typical market centre, in the western provinces.

Financial Development and Capital Formation D. MOLE A process of financial development improves the flow of funds between surplus units and deficit units in an economy. If transactions are better organized they should be cheaper to undertake and borrowers and lenders will be able to do business at lower interest rates. J.G. Gurley and E.S. Shaw have suggested that the long downward trend in interest rates after 1920 was in part the result of the rapid financial innovation of the decade.1 Also, if savers are offered more tempting stores of wealth (life insurance contracts, trust company deposits, or whatever) the general rate of saving may rise. Meanwhile, if financial institutions and markets engage in more effective arbitrage and nonfmancial enterprises take consistent advantage of external funds and external opportunities to invest their own undistributed surplus, the efficiency with which funds are placed will rise, the return on real investment will improve and the yield, risk and term characteristics of the portfolio of assets being accumulated will be closer to optimal. All in all, these effects might be expected to increase the rate of capital formation in an economy enjoying rapid financial innovation. A subsidiary effect might be the increasing integration of nonfinancial enterprise into the general capital market with a decline in internal financing and a broadening of ownership.

Debt and Gross National Product As a preliminary to any extended discussion of the impact of financial development on capital formation, it is worth looking at some simple numbers relating overall outstanding debt (plus stock issues) to measures of national income. The Gross National Product (GNP) in Table 1 may be taken simply as a yardstick putting the increase of financial liabilities in suitable perspective, or as a proxy for national wealth, direct estimates of which are on shaky conceptual and empirical ground. The table clearly brings out the advance of debt relative to income. The ratio calculated may overstate the relative change if publicly and formally contracted debt made inroads on largely unreported private arrangements. On the other hand, national income estimates suffer from essentially the same bias, so the general conclusion that the ratio of debt to income rose is probably sound. Source: D. Mole, "Aspects of Canadian Financial Development: 1900-1940" (Ph.D. thesis, University of Toronto, 1987), ch. 3. Reprinted by permission of the author.

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Table 1: Debt Outstanding and Cumulated Stock Issues Relative to GNP ($ million). Year

Debt and stock

GNP

Ratio debt stock/GNP

1900

1,182

907

1.3

1915 1920 1925 1930 1933 1939

4,418 8,402 9,892 12,776 13.676 13,263

2,689 5,061 5,067 5,720 3,492 5,621

1.6 1.7 2.0 2.2 3.9 2.4

Sources: D. Mole, Aspects of Canadian Financial Development: 1900-1940 (Ph.D. thesis, University of Toronto, 1987), Table 1.1; M.C. Urquhart, "New Estimates of Gross National Product, Canada, 1870-1926" (discussion paper no. 586, Department of Economics, Queen's University, 1984); Statistics Canada, National Income and Expenditure Accounts, vol. 1: The Annual Estimates (Ottawa, 1976).

As debt outstanding becomes relatively enlarged in this way we are observing the increasing tendency to capitalize income streams. Between 1900 and 1930, financial claims on a dollar of revenue doubled on average—"even the trees blush at the load they bear" comments a contemporary.2 In part these debts arose in the course of adding to the capital stock, and in part they merely capitalized a right to income that had been hitherto unencumbered by debt. The balance between these possibilities could be assessed if, besides the estimates of national income, we had estimates of capital stock or of the capital-output ratio. We do not have such estimates until 1926, but given the long-run tendency for the average product of capital to rise (from 0.257 [1926] to 0.348 [1960] on one simple calculation), it is likely that the rise in the debt-income ratio reflects a good deal of capitalization of income unmatched by additional real capital formation.

Aggregate Capital Formation Although we have no estimates of capital stock, we are fortunate in having annual figures for gross fixed capital formation by sector for the entire period.3 These make possible an assessment of the relation between finance and investment and by extension throw light on the question raised above about the capitalization of income. In Table 2 these figures are reproduced for quinquennia. The table gives the overall percentage of capital formation (including

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residential housing) to GNP, the percentage of capital formation less government investment to GNP (private capital formation), and the percentage of capital formation less capital inflow (the domestically financed portion of total capital formation); finally, government deficits are added in to indicate total domestic savings by the private sector. The numbers are calculated on a gross investment basis. It should be recalled that capital consumption runs at about one-tenth of GNP, so net figures are the gross percentage less about 10 percent.

1

Igor (1) (2) (3) (4)

1905 21.1 19.4 15.6 14.6

Table 2: Capital Formation and GNP (percent) 1 1 1

looeP 19TI IgieP Hm 1926 1910 26.4 24.4 16.8 19.8

1915 28.3 25.1 16.0 22.2

1920 15.0 13.6 14.8 25.3

1925 16.8 14.6 16.9 19.3

1930 19.2 16.4 17.3 17.3

I93T1 19361935 11.7 8.7 11.3 16.9

1940 12.8 10.3 15.8 17.0

Sources: Urquhart, 1984; and Statistics Canada, 1976, cited in Table 1; K.A.H. Buckley, Capital Formation in Canada (Toronto, 1973). (1) (2) (3) (4)

Gross fixed capital Private gross fixed Gross fixed capital Gross fixed capital

formation/GNP. capital formation/GNP. formation less current A/C deficit/GNP. formation less current A/C deficit plus govt. deficit/GNP.

The figures do not suggest any definite upward trend and therefore no positive financial development effect is apparent. Overall capital formation as a percentage of GNP is quite variable but shows some tendency to decline. Much of the variability, however, is removed when capital inflows are deducted—the decline in capital inflow and government capital formation after 1915 account for most of the overall decline. Domestically financed capital formation is very steady. If government deficits are included to give a figure for domestic saving, the 1916-20 period stands out from a fairly stable run of percentages. Also note that the 1926-30 period shows strong capital formation on any measure although domestic saving is not especially high because there was virtually no government deficit and capital imports were significant. The stability of capital formation is in contrast to the rising rate of debt to income. Table 3 shows the aggregate comparison of "increase in debt plus equity issues" and capital formation. An estimate of net capital formation is made for this table because current revenues should generally offset capital consumption and the accumulation of the capital stock depends on net capital formation. The interesting feature of this table is that financial liabilities were issued in excess of net increases in real assets in every quinquennium after 1916 except 1921-25, when they are at nearly the same level. Even the aggregate

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226

figures of Table 3 make it clear that government financing (1916-20) and the cyclical movement in business finance and investment after 1926 are important. Table 3: The Issue of Financial Liabilities and Capital Formation ($ million)

1901-15 1916-20 1921-25 1926-30 1931-39

Issues1

Fixed Capital Formation

3,235 3,984 1,490 2,884 487

Gross 7.098 3,142 3,789 5.514 5,068

Net2 3,968 1.050 1,532 2,203 -286

Sources: D. Mole, Aspects, Table 1.1; Urquhart, 1984; Statistics Canada, 1976. 1 Change in Debt Outstanding plus Stock Issues. 2 Before 1926 GFCF less 10 percent GNP.

Capital Formation by Sector Table 4 is an attempt to clarify the situation by means of a sectoral disaggregation. Unfortunately, data problems make it necessary to return to gross capital formation estimates— it is worth considering the sectors in turn. Government is clearly a source of debt without asset accumulation. In the two periods 1916-1920 and after 1930, this tendency to run a deficit to finance current expenditure is especially marked. Railways also raised funds in excess of net capital formation because the replacement and repair component is so large. In the 1926-40 years, for which there are reliable estimates, some two-thirds of gross investment was for repair and maintenance.4 On Buckley's estimate no more than $100 million of the expenditure of the railways between 1921 and 1925 was net investment. In the case of the railways it is clear that current revenue was chronically inadequate to finance the maintenance of capital. Existing assets were progressively burdened with debt and the existing equity interest, if any, was diluted. Households seem not to have borrowed to finance current consumption, in part because such borrowing was not generally possible except against life insurance policies and on a short-term basis at stores. Consumer debt remained very small (less than $400 million outstanding in 1938).5 Mortgage debt increases appear to be less than the increase in net residential housing stock. For the period for which we have figures, repair and maintenance is about 20 percent of residential construction. This tendency for household equity in the housing stock to be well maintained is in line with the lending constraints placed on institutions until 1935.

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227

Table 4: Issue of Financial Liabilities and Gross Capital Formation, by Sector ($ million)

1901-15 1916-20 1921-25 192&-30 1931-39 1901-15 1916-20 1921-25 1926-30 1931-39

Issues GFCF Government 911 792 2,665 367 364 633 444 809 1,771 1,316 Households1 124 1,352 47 401 188 825 409 1,114 -54 979

Issues

GFCF Railways 1,164 1,320 493 422 852 389 555 636 -658 381 Nonrailway business2 1,300 3,634 820 1,952 34 1,941 1,564 2,955 -181 2,392

Sources: Statistics Canada, see Table 1; D. Mole, see Table 1. 1 Residential construction. 2 Residual

The non-railway business sector is in many ways the most interesting because it is with respect to business investment that market mechanisms operate most directly. Table 4 brings out some aspects of the situation. First, the rapid capital formation in the 1916-20 and 1926-30 periods is apparent as is the rapid advance of business debt. In the former period, debt increases arise chiefly from inflated bank lending, but in the latter period a broad range of debt instruments was employed. Second, the contrast between the 192125 and 1926-30 quinquennia represents the chief evidence for some financial development effect on investment. Financing ran at very high levels 1926-1930 and this facilitated high rates of capital formation. These numbers suggest that the period of the 1920s is worth a closer look. The evidence reviewed to this point about financing and the rate of capital formation suggests the following propositions. First, that financial development, whatever else it may have been doing, did not raise the overall rate of capital formation, with the possible exception of the 1926-30 period. Second, that on the whole more money was raised by the issue of debt instruments and new equity than was invested in the net accumulation of the capital stock. Third, that railways got into debt to maintain capital intact, government got into debt to finance current consumption, and households maintained their equity in the housing stock. The situation with regard to non-railway business is worth further study.

228

D. Mole

Business Investment In the period after 1920 considerably more information is available about investment and financing. I have produced annual estimates of net bond issues and stock issues with some sectoral disaggregation. I have also standardized a large sample of corporate balance sheets for 1922 and 1930. In the published sources we have national income accounts for years after 1926, capital stock estimates after 1926 and annual investment estimates for the entire decade.6 This information bears on three issues: the timing of capital formation and its financing; the sectoral distribution of these aggregates; and finally the balance between internal and external financing of assets. Consider first Table 5, which makes possible a comparison of non-railway business investment in fixed capital and the issue by this sector of long-term liabilities. One interesting aspect of this table is the tendency for financing to lead investment. The heavy issues of 1926-1928 bore fruit in heavy investment in 1927-1930. Another interesting feature is the generally high level of financing relative to investment. Overall, about one-half of the investment from 1920 to 1931 was covered by bond issues and new equity issues. Given that depreciation runs to at least half of gross investment in years for which secure numbers are available there was financing to cover all of the net addition to the capital stock. Both of these findings from Table 5 suggest that financial development was important at least in the aggregate and that the vitality of the postwar securities markets did at least facilitate the post-1926 investment surge. This conclusion for the aggregate numbers must be modified somewhat when more disaggregated data are reviewed. Table 6 attempts to match a rough disaggregation of my net bond issue series to the disaggregated investment data in Fixed Capital Flows and Stocks.7 The chief result is to bring out the extraordinary concentration of bond issues in two sectors: pulp and paper; and light, heat and power, this sector consisting chiefly of the great hydro projects. In the decade 1920-1931, pulp and paper issues represented 19 percent and light, heat and power issues 41 percent of the total issue of non-railway corporate bonds. Between 1926 and 1931 when over 80 percent of net corporate issues were made, pulp and paper accounted for 15 percent and light, heat and power for 44 percent of the total. The issue of equity was more varied but I estimate that 25 percent of the stock issues I have tabulated from 1926 to 1931 were on behalf of these sectors. Financing for power projects in fact ran higher than these statistics indicate. The Hydro-Electric Power Commission of Ontario was financed directly by the province and by issues of bonds guaranteed by the province. The figures for provincial bond debt include Ontario Hydro debt as follows: in 1921 $104 million; in 1925, $146 million; and in 1930, $188 million.8

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Table 5: Non-railway Business Investment and Security Issues ($ million) Investment1 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930

318 234 334 330 308 321 309 380 502 584 479

Net Security Bonds 35.4 52.5 35.9 46.6 15.6 22.1 135.2 202.8 95.4 134.5 147.8

issues2 Stock 58.2 17.4 33.0 21.0 47.4 57.0 94.5 133.7 187.0 144.8 32.0

Investment less Issues 224 164 265 262 245 242 79 44 220 305 299

Sources: Statistics Canada, see note 2; D. Mole, see Table 1, app. A. 1 Gross investment expenditure less gross investment of: railways, governments, finance and real estate, agriculture and residential construction. 2 Bus!ness issues less issues of railways, F.l.'s and real estate.

In part, this specialization in security issues reflects the investment share of these sectors. Pulp and Paper represented 10 percent and light, heat, and power 14 percent of the relevant total of non-railway corporate investment in the period 1920-31. But issues for these sectors were more than twice as great as their share of investment would suggest. In the case of the light, heat, and power issues, scale was evidently important. The older utilities did a good deal of refinancing and raised funds as demand for service increased, but the largest sums were raised for new projects. In 1927, for example, when almost half the net bond issues were for power projects, we find Gatineau Power Company taking $18.5 million and Shawinigan Water and Power Company $35 million. These hydro power facilities were the largest capital projects of the period, but they could not be financed out of any current revenues, nor by even a large syndicate of private individuals. They won long-term contracts for the supply of power to mass markets and had a quasi-public status, confirmed for the most part by their ultimate absorption into the public sector. All in all these were long-term, indivisible, low-risk projects, and bonds were their natural financing instrument. It might also be said that the importance of these securities reflects some weakness in the capital market of the period. The hydro issues were akin to the railway and government issues that were the staple of the bond market.

D. Mole

230

Table 6: Gross Investment and Bond Issues, Key Sectors ($ million)

Investment Pulp & Paper Hydro 54 31 17 19 28 30 37 56 44 40 49 65 48 44 53 47 53 63 30 76 31 92 16 77

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931

All1 318 234 334 330 308 321 309 380 502 584 479 301

1920-24 1925-29 192^-31

100 100 100

12 11 6

All1 35 53 36 57 16 12 145 203 95 125 148 43 (percent) 11 100 14 100 18 100

1920-31

100

10

14

100

Net bond issues Pulp & Paper Hydro 12 5 14 13 6 4 11 28 10 8 13 1 26 92 45 62 32 16 22 60 -5 72 -2 37 ,

27 24 5

29 40 53

19

41

Sources: D. Mole, see "Aspects," Table 1, app. A; Statistics Canada, 1978 n. 2. 1 See Table 5 n. (1).

The scale of the financing and the eye-catching size of the projects had the same quality as the great infrastructural developments of previous decades. Investment in them had the same colouring of patriotism and public service, an important consideration in the period. All in all the market was ready to finance hydro facilities, but not so apt to finance less-celebrated undertakings. The pulp and paper issues arose from some combination of four factors. First, at least some of the projects were on a large scale and the industry carried relatively more fixed capital than other sectors. My figures suggest that fixed assets ran to about 75-80 percent of all assets for the wood and paper group and to about 60 percent of assets for manufacturing as a whole.9 Second, the industry was attempting to modernize its operations and gain economies of scale in the face of declining prices and sluggish current revenues. It was therefore forced into the public market for funds. Third, one reaction to the industry's developing difficulties was the massive reorganization of ownership

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231

through mergers, takeovers, and changes in capital structure. Such reorganizations were typically an occasion for the issue of bonds and stock, especially preference stock. Finally, there was a fashion for these issues. They were issues of major concerns, the fastest-growing sector, the new industrial phenomenon, and near to the security markets of central Canada. Once a market can be made for a security, distribution improves, a secondary market develops, economies of scale in trading emerge, and the security is raised by its own bootstraps into a better investment, at least for a time. This consideration was important in the relatively underdeveloped markets of the period. Looking at both the aggregate numbers and at the disaggregated series we may reiterate the conclusion that the financial facilities of security markets were very important, though it should be noted that both sectors that made disproportionate use of public issues were pushed into the market for funds by their circumstances. As well, these sectors enjoyed a privileged access to external funds because, in the embryonic capital market of the period, the public sentiment that developed in relation to them was important. The other side of the importance of these two sectors is the relatively small use of public issues by enterprises in other industries. It is clear that the financial mechanism had a long way to go before it typically facilitated the impartial estimate of proposals for funding. Moreover, it seems that sectors that could avoid external financing were inclined to do so. A more detailed investigation of the finance of business is possible for years after 1926 on the basis of the national income accounts. These accounts give estimates of business saving which is an element of the financing environment not yet brought into play. Table 7 reproduces figures from the national accounts. The corporate sector includes railways and government business enterprises and is therefore not comparable with my corporate bond series. There is nothing that can be done about this but the reader should recall the steady increase in railway debt. As the table shows, the net borrowing of the corporate sector increased markedly to 1929, from 29 percent (1926) to 50 percent (1929) of gross fixed capital formation, and from 60 percent (1926) to 86 percent (1929) of net fixed capital formation. The increase in net borrowing occurs as capital formation increases and as undistributed profit turns down after 1928. Although external funds were important, business saving and internal funds were also important. Between 1926 and 1930 the total of gross fixed capital formation and inventory accumulation by the sector is $3,708 million, while net borrowing is $1,105 million, or 30 percent of gross investment and 49 percent of net investment. The net lending series in the national accounts is a residual and is not directly assessed. It measures the gap between gross investment and business saving. Table 7 shows that this financing gap was in fact considerably less

232

D. Mole Table 7: Saving and Investment of Corporate and Government Business Enterprise ($ million)

1926 1927 1928 1929 1930 1931 Gross fixed capital formation Nonfarm business inventory

445 154

536 163

668 126

799 146

630 41

Undistributed corp. profit Inventory valuation adjustment Corporate capital consumption

189 46 236

226 29 264

272 1 300

225 -15 324

-2 -125 239 172 319 275

Net lending and net purchase of existing nonfinancial assets

-128

-180

-221

-411

-115

424 —54

-48

Net bond issues of non-railway corporations Issues of industrial equity

135 94

202 134

95 187

134 145

148 32

43 4

All securities

229

336

282

279

180

47

Sources: D. Mole, see "Aspects," Table 1, app. A; Statistics Canada, 1978 note 2.

than the financing being done. Even leaving out railway financing, some $250 million raised on the capital market was not required to finance corporate investment. Also, the bank loans of the business sector grew by $246 million from year-end 1925 to year-end 1930.10 This tendency to encumber the existing capital stock with new debt or to dilute the equity interest in net worth was not an unusual phenomenon. In the period there seem to have been three chief occasions for the issue of new financial liabilities by corporations without any corresponding expenditure on additional real capital: changes in capital structure incidental to mergers or takeovers, the sale of a private business, and the revaluation of the assets of an existing corporation. Very often all three of these opportunities to sell liabilities without adding to assets occurred together. In 1928, for example, the Standard Paving Company, an Ontario firm organized in 1919, went public and issued 45,000 $25 shares through the Toronto Curb Market. Pleased with the success of this financial experiment, the directors formed Consolidated Sand and Gravel Ltd. This company issued $1.2 million in preferred stock and acquired the assets of five small-town Ontario gravel operations. The directors then formed Standard Paving and Materials which in 1929 issued $1.5 million in preferred shares to purchase Consolidated Sand and Gravel and two other firms. They then swapped 115 common shares

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233

of Standard Paving and Materials for 100 Standard Paving shares. In 1928 Standard Paving had shown fixed assets of $400,000 and goodwill of $399,000. By 1930 Standard Paving and Materials held assets valued at $2.3 million and goodwill of $633,000. All in all merger, the absorption of private firms, and the revaluation of assets had produced some $2 million in new financial instruments without there having been any very considerable advance in southern Ontario's capacity to mend its roads. This point may be made more forcefully by considering the financing and investment of all sectors of the economy. According to my estimate, about $3 billion was raised by issuing new financial liabilities in the period 1926-30 (this estimate does not include any loans and mortgages negotiated informally which together add perhaps $500 million). Business saving less capital consumption allowances is over $1 billion and if households put equity into residential construction worth half the value of the new residential construction, they contributed an additional $500 million. Altogether, about $5 billion seems to have become available for investment in new assets. In the period, however, no more than $3 billion was added to the net capital stock, including housing and inventory accumulation. Although the information reviewed above permits a fairly good grasp of the main relationships and rough magnitudes involved in the financing of business capital formation in this period, I have undertaken a study of a large group of corporate balance sheets to provide a more detailed picture of the financing process. The balance sheet, after all, is designed to display, on the liabilities side, the source of funds and, on the asset side, their disposition. Also, in contemporary flow of funds accounting, balance sheets are the basis for the statistics and, as the reader will be aware, this project has in part been designed to provide an indication of the flow of funds for this period in the absence of any systematic tabulations. Mine is not the first study of pre-World War II balance sheets. A study of the 1926-1946 period was undertaken as part of the national accounts project using information gathered for tax purposes.11 The authors of this compilation make very few claims for it and many of the series are rated only poor or fair. Some of the categories of the standard balance sheet are not reported at all. Some of the data collected are summarized in Table 8. It provides another check on estimates made from other sources. It will be seen that the increase in funded debt is close to my total for corporate and railway issues, the increase in bank loans is considerably less than that suggested by banking data, but the latter are not broken down very conveniently so this figure may be more reliable. The accumulation of financial assets (even excluding the liabilities of subsidiaries) is notable; at $429 million this is almost half of the undistributed corporate profit for the quinquenium. The sources and methods for my own study are explained elsewhere.12 Essentially what I have done is to locate ninety-six balance sheets for firms that

234

D. Mole Table 8: D.B.S. Balance Sheet Study, Key Statistics ($ million) Sources of Funds 1926-1930 Bank Loans 167 Funded Debt 1007

Uses of Funds 1926-1930 Cash Financial Assets Receivables Inventory Investment in Subsidiaries

49 429 74 172 694

Source: Dominion Bureau of Statistics, Selected Corporation Financial Statistics, 1926-1946 (Ottawa, 1958).

remained sufficiently intact between 1922 and 1930. The balance sheets were reorganized to a standard format and fixed capital, which was very variously treated, was put on a gross basis with a reserve offset on the liability side equal to depreciation. The list of firms was not chosen to reflect what is known about the structure of the economy. Utilities, iron and steel, and mines are somewhat too large relative to the overall structure of the economy, but the bias is not great. Also, gross fixed assets for my firms in 1926 are 81 percent of their 1930 value, while the comparable growth in gross capital stock for the economy as a whole was less, the 1926 stock being 88.4 percent of the 1930 stock. But it is likely that growth in gross fixed assets in the corporate balance sheets is inflated by the tardiness with which assets are written off, so the growth of fixed assets for these firms is probably close to the average growth for the economy. Fortunately, it seems to be the case that the structure and dynamics of my firms are not out of line with at least the non-railway subset of business corporations. A good deal of the information yielded by the balance sheet data is presented in Table 9. Prom 1922 to 1930 the group as a whole added about $450 million to their gross fixed capital and $300m to net fixed capital (i.e., the change in gross fixed capital less the increase in depreciation reserves). The main use of funds, other than for the acquisition of durable assets, was to acquire financial assets worth about $100 million with a further $40 million being used to acquire additional interests in subsidiaries. These expenditures were financed in part by new bond debt worth $126 million (i.e. half the growth in net fixed assets). It will be recalled that of the $300 million increase in equity, some $100 million was derived from recorded public issues, with the remaining $200 million arising from a wide variety of changes in capital structure. Bank debt played a negligible role in financing new assets.

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235

Table 9: Distribution of Corporate Assets and Liabilities (%) (1)

Assets: Cash Receivables Financial assets Inventory Fixed assets Subsidiaries Other Liabilities: Bank debt Payables Funded debt Equity Depreciation reserve Other reserves Surplus Total ($ million)

Assets: Cash Receivables Financial assets Inventory Fixed assets Subsidiaries Other Liabilities: Bank debt Payables Funded debt Equity Depreciation reserve Other reserves Surplus Total ($ million)

(2)

(3)

2 2 5 2 5 9 11 8 63 75 8 1 5 3

2 7 6 15 61 1 7

3 6 6 4 20 6 52 60 7 1 3 1 — 10 11 1496 151 (1)

(2)

2 5 8 9 65 7 3

2 2 22 7 62 2 1

2 — 5 6 20 — 50 48 12 19 3 9 8 18 2162 220

(4) (5) 1922

3 10 15 13 51 1

3 10 12 14 50 2 1 0

3 8 18 52 6 2 11 945

8 1 8 17 51 6 — — 91

2 8 21 39 7 5 16 89

(3)

(4) (5) 1930

6

(6)

(7)

— 3 2 13 79 —

1 1 7 2 4 3 12 2 72 64 2 26 2 2 2

7 4 18 64 3 1 2 122

3 4 21 51 6 3 12 379

1 4 30 49 7 — 9 400

(6)

(7)

(8)

1 8 9 16 55 6 5

1 4 5 13 77 — 1

2 8 4 11 72 2 1

1 2 5 1 71 17 2

3 6 4 6 1 3 6 14 7 13 52 44 46 12 12 14 2 4 3 10 13 13 1199 144 113

5 3 24 53 9 — 5 185

3 6 16 51 11 2 12 399

2 4 34 46 9 3 3 744

2 8 8 13 61 3 5

3 9 15 19 49 1 5

Source: D. Mole, see Table 1 App. C. (1) (2) (3) (4)

All corporations Mines, oils and smelters All manufacturing Food and beverages

(8)

(5 (6 (7 (8

Textiles and clothing Wood and paper Iron and steel Utilities

236

D. Mole

Although the increase in bond debt was fairly considerable relative to the accumulation of fixed assets, the leverage of these firms did not increase; in fact their external debt to asset ratio fell as bank lending and payables declined. Moreover, in 1922, sixty-nine of the corporations had bonds outstanding; in 1930 only fifty-eight had any bond debt. These figures highlight one important respect in which these firms were unlike the corporate sector as a whole. Bond debt in 1922 is 70 percent of its 1930 value for the group, my own aggregate estimate based on corporate issues puts corporate debt in 1922 at 50 percent of the 1930 value. If the corporate sector had behaved like the group, some $400 million in bonds would not have been issued. There are two possibilities. First, my estimate of net bond issues could be an overstatement. I do not think this is a major factor; as my bond series conforms well to the Dominion Bureau of Statistics estimates of corporate bond debt after 1926. The second possibility is that my list has missed many of the big bond issues. This may have occurred for at least two reasons: many of these large issues were associated first, with major mergers and reorganizations, and second, with new hydro projects. In both these cases comparable balance sheets for both 1922 and 1930 could not be obtained. This is in a sense a group of firms that omits those that made extraordinary use of the bond market. Returning to Table 9, note that the addition to bond debt is only a little larger than the addition to financial assets. A kind of financial intermediation was evidently part of the activity of these nonfinancial corporations. The steady acquisition of financial assets in a period in which one was looking for capital formation rapid enough to drive enterprises into debt is surprising. It is evidence both that the boom of the 1920s was neither so general nor so strong as is sometimes supposed, and that firms did not very readily distribute surplus funds to their owners, but were inclined to accumulate them within the enterprise, even when no capital project of their own was in prospect. Turning to the data for individual sectors, it is no surprise to find that the wood and paper group and utilities did increase leverage. Also note that the former made unusually great use of bank debt. The corollary is that all the other sectors reduced their leverage, with food and beverages, iron and steel, textiles and clothing, and mines all showing actual reductions in bond debt. Like frugal farmers these enterprises were using the good years to increase equity rather than to increase their assets. Of course some firms show an actual decline in assets. The information presented above supports the following general conclusions about financial development and capital formation. First, the sums raised by the issue of debt instruments and new equity were large relative to the investment being done, and at the peak of the late 1920s boom, access to the capital market was essential in sustaining the scale of accumulation. Second, despite the great quantity of debt instruments and equity being issued, and

Financial Development and Capital Formation

237

the concentration of these issues in the 1920s, there is little evidence that the rate of capital formation increased through the period. Third, the financial system tended to specialize in the issues of only two sectors—newsprint and hydro projects. This specialization might reflect some weakness in the facilities made available to other enterprises. Fourth, most private enterprises did not use the public capital markets (or bank debt) to any extraordinary extent. They used the larger revenues of the 1920s to undo their leverage, and any positive financial development effect on rates of growth passed them by. Finally, the evidence suggests that much of the new money raised by the issue of liabilities was not disposed of by the accumulation of fixed assets or inventory, especially because a good deal of the accumulation of real capital must have been financed out of current revenue depreciation accounts, undistributed profit, householder saving to provide equity in homes, and so on. These results are rather meagre, so much so that they cast doubt on the extent or importance of financial change during the period. Whatever direct evidence there may be for the development of a mass national capital market, the indirect evidence is that many enterprises were unmoved by this financial revolution and that it stopped short at their doors. But it is illuminating to consider the counterfactual case, that is that no national financial system emerged during and after World War I. There are two aspects to any assessment of this counterfactual hypothesis. First, in the absence of sufficient financial facilities would capital formation in fact have been less than it was? I do not think that this issue can be usefully pursued as a quantitative question. Instead consider two points. Although the rate of capital formation relative to national income did not show much tendency to rise in the period, the absolute amount of capital formation being accomplished did grow enormously—from $3.5 billion (1911-15) to $5.5 billion (1926-30).13 Also, this period was one of significant economic change for Canada: the economy became more varied, more complex, more geographically extended, more modern. For both of these reasons qualitative change in the mechanisms of finance was required, if only to sustain the rate of saving in the economy and the reasonably effective flow of funds from savers to investors as the distance between surplus and deficit agents grew. Second, the financial development I have identified was very much bound up with the emergence of a domestic financial capacity. In the counterfactual case presumably some financing would have returned to London, as it did in the case of Australia,14 and more would have gone through New York. The advantage of domestic financing may have been slight, a matter of information and transaction costs. This advantage might not have made much difference to capital formation. On the other hand, Canadian equity could not easily have been floated in New York, nor could the bonds of many smaller firms and remote jurisdictions. If access to New York had been a determining factor, the structure of capital formation and the pattern of ownership of the capital stock

238

D. Mole

would have been considerably altered. In fact, the opportunity created by the postwar situation to develop a Canadian financial system was exploited. This is important for a country whose economic system is so considerably shaped by its relationship to the North American economy as a whole.

Notes [1] J.G. Gurley and E.S. Shaw, "Financial Aspects of Economic Development," American Economic Review (1955):45. [2] The Monetary Times (5 Nov. 1926): 13 [3] Statistics Canada, Fixed Capital Flows and Stocks, 1926-1978 (Ottawa, 1978). [4] Dominion Bureau of Statistics, Public and Private Investment in Canada, 1926-1951 (Ottawa, 1951), 170. [5] Bank of Canada, Financial Summary, Statistical Supplement (Ottawa, 1954). [6] D. Mole, "Aspects of Canadian Financial Development: 1900-1940," (Ph.D. thesis, University of Toronto, 1987) app. A and C; Statistics Canada, National Income and Expenditure Accounts, vol. 1: The Annual Estimates (Ottawa, 1976); and Statistics Canada, Fixed Capital [7] Statistics Canada, Fixed Capital [8] D. Mole, "Aspects," Table 1.2; and D.C. MacGregor, "The Problem of Public Debt in Canada," Contributions to Canadian Economics (1936) 2:56. [9] D. Mole, "Aspects," app. C. [10] M.C. Urquhart and K.A.H. Buckley eds., Historical Statistics of Canada (Toronto, 1965), H126. [11] Dominion Bureau of Statistics, Selected Corporation Financial Statistics, 1926-1946 (Ottawa, 1958). [12] D. Mole, "Aspects," app. C. [13] Statistics Canada, Fixed Capital [14] A.F.W. Plumptre, Central Banking in the British Dominions (Toronto, 1940), 12.

Economic Growth in the Atlantic Region, 1880-1940 D. ALEXANDER It has been customary for historians to treat the Maritimes and Newfoundland as two regions rather than one. This reflects, very probably, nothing more credible than an academic inertia about widening horizons. Although there were profound differences in the level of economic activity and in the rate of growth of the two economies before World War II, R.E. Caves and R.H. Holton rightly pointed out nearly two decades ago that they shared a common economic niche.1 This essay has several purposes. The first is to encourage historians of the Atlantic region to make more efforts to bridge the Cabot Strait. This effort would add fresh perspectives on the troubles and successes of both the Maritimes and Newfoundland. It would also conform to modern political, economic, and planning reality. A second purpose is to provide a systematic quantitative assessment of the growth of the Newfoundland economy from 1880 to 1940 in relation to that of the Maritimes. While work has been done on the Maritimes, little exists for Newfoundland for this period. This effort is only a beginning, but it does offer a new approach to the island's economic record before Confederation. The final objective is controversial. In the Maritimes, even among some cautious academics, there is an "underground hypothesis" that the provinces sacrificed their economic potential by entering the union with Canada in the 1860s and 1870s. By contrast, the sometimes unhappy history of Newfoundland is commonly attributed to its stubborn rejection of the Canadian wolf until 1949. Given the economic and social similarities, it is unlikely that these two contradictory hypotheses can both be true. Therefore, does the comparative economic performance suggest that the date of entry into Confederation was a critical variable in the progress of either the Maritimes or Newfoundland? The union of the British North American colonies provoked both fear and optimism in the Maritimes—fear that the provinces would be reduced to colonies of Upper Canada, and optimism that they would develop into the workshop of the new Dominion. That such opposite predictions existed is perhaps a sign of the critical turning point upon which the Maritimes were poised in the 1860s; that they became a dependency rather than a workshop, however, is not in itself proof that the doubters were prescient. The brief Source: D. Alexander, "Economic Growth in the Atlantic Region, 1880-1940," Acadiensis (Autumn 1978) 8(l):47-76. Reprinted with permission.

240

D. Alexander

trade recession following Confederation, and the deeper recession of the 1880s and 1890s, were taken by opponents of the union as confirmation of their fears. But both were general to Canada and proved nothing. The great boom which swept Canada at the turn of the century, while only generating a mild flutter in the Maritime economy, could be taken as a more serious sign. But Maritime consciousness of economic stagnation and relative decline within the Dominion of Canada only assumed the stature of certainty and reality in the 1920s.2 Since the Maritimes still commanded some weight in the country and the presence of sharp regional inequalities was something that still surprised and concerned Canadians as a whole, the interwar period was rich in official inquiries of royal stature. These inquiries were usually highly specific—fiscal problems and industry problems—which was a suggestion that the difficulties were not thought to be irrevocable. They began with Sir A. Duncan's inquiry into the coal industry in 1925, followed shortly by the more far-reaching inquiry into fiscal arrangements.3 Two years later distress in the fishing industry and the "trawler question" generated a study by Justice A. MacLean.4 Duncan returned in 1932 with another study of the coal industry,5 and finally in 1934 the Province of Nova Scotia assembled a distinguished commission to undertake a wide-ranging inquiry into that province's economic troubles.6 A year later Sir T. White reviewed the earlier work of Duncan on Maritime claims.7 After 1935, however, the specific problems of the Maritime region were absorbed into the general problem of metropolitan Canada and "the regions." The great Royal Commission on Dominion-Provincial Relations began this tradition,8 although unlike its successor in the 1950s, the Gordon Commission,9 it at least published a background study on the Maritimes rather than simply a study of regionalism. It was left to Nova Scotia to undertake a major piece of postwar planning, under R.M. Dawson.10 But apart from another, almost inevitable study of postwar slump in the coal industry, the nation eschewed further inquiries into the Maritimes of the formal magnificence of the interwar royal commissions.11 Since the problems had not disappeared, this might seem curious. It reflected, in part, the institutionalization of analysis within expanded provincial and federal civil services, where much more inquiry was undertaken in a continuous way rather than by the grand royal commissions.12 Moreover, the urgency of inquiry was muted by the growth of prosperity in the region, even if much of it was accounted for by unearned income. One also suspects that some of the urgency that was felt in the interwar years about the decline of the Maritimes was lost simply because the region had become an insignificant fraction of the nation, and its economic plight was accepted as lacking a solution. Having ceased to be an important area of national concern, the burden of research fell upon the region itself.13 Perhaps this is as it should be, but in the 1950s the universities, while numerous, were mainly weak, and it is only in recent years that any volume of work has emerged, frequently sponsored by

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241

government and private organizations.14 Historical analysis of the decline of the Maritimes is still not voluminous. The established interpretation began in the interwar period with S.A. Saunders, a product of the staples school of geographic determinism, who accepted Maritime decline as a function of the obsolescence of wind, wood, and sail.15 This was a narrow interpretation of the structure and dynamism of the nineteenth-century Maritime economy, and it has never been satisfactorily explained why the equally "woody and windy" Scandinavians managed to pass, at great profit, into the vulgar world of oil-fired turbines. This same geographic determinism accepted the inevitability of manufacturing and financial activity migrating to Upper Canada, and at the end of World War II this resigned pessimism was given a scientific basis. B.S. Keirstead argued that the increasing size of firms at the turn of the century favoured growth in Ontario and western Quebec, with their large populations, excellent communications, and agglomerations of labour skills, capital, and interindustry linkages. The decline of the Maritimes, located on the fringe of the tariff-protected Canadian market, was inevitable, as was the relocation of its financial institutions.16 Historians have recently suggested that the process was not as neutral as Keirstead's arguments imply. E.R. Forbes points to the loss of regional control over the rate structure of the Intercolonial Railway in 1918 as the cancellation of a critical tool of regional development which had served the Maritimes well during the previous forty years.17 T.W. Acheson has shown that Maritime entrepreneurs were remarkably successful in the early decades of Confederation in shifting the economy from a North Atlantic to a continental focus, although ultimately the absence of a strong regional metropolis left the region's industries vulnerable to takeover and weak in pressing regional interests in national policy.18 The most direct attack on the widely held Keirstead explanation of Maritime underdevelopment, however, was R. George's demonstration that there were no cost disadvantages to manufacturing in Nova Scotia for the Atlantic and central Canadian market in the 1960s which could explain the concentration of manufacturing in Ontario and Quebec.19 Stagnation in the region, in other words, was not inevitable and it is not beyond correction. The accepted interpretation of Newfoundland's economic development is radically different from that of the Maritimes, for no-one has argued that Newfoundland became relatively poorer or less developed, and few have been so bold as to suggest that it had any assured prospects. The first thorough inquiry into the country's economic state and prospects came with the Amulree Royal Commission in 1933, which recommended the country be closed down.20 At the end of World War II, the volume of studies by R.A. MacKay was generally gloomy about the country's past and future,21 and a more powerful unpublished work by H.B. Mayo saw little prospect for Newfoundland either as a province of Canada or as an independent country.22 For a long time such

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pessimism was submerged by the ebullience of the province's first premier, activity in the new resource frontier in Labrador, and the general prosperity which swept the western world in the 1950s and 1960s. But underneath the new optimism was the serious problem of a huge, decaying fishing industry and its dependent rural population. When this issue reemerged in the mid-1960s a bitter and still unresolved debate ensued between those who recommended a planned reduction of the island's population,23 and those who fought for a revitalized rural fishing economy.24 While the relatively late development of the province's university has meant that historical work on Newfoundland's economic development is only in its infancy, what exists has not confirmed the argument that the province was or is hopelessly unproductive.25 Indeed, the economist G. Goundrey has noted that the proportion of gross provincial product arising in the goods-producing sectors in Newfoundland exceeds that for Canada as a whole.26 Although identification of the turning point is still uncertain, it is agreed that by 1940 the Maritime economy had declined in size relative to Canada's. But what was its position compared with Newfoundland's? Population and labour force growth is a crude and sometimes misleading index of economic expansion but a useful beginning to analysis. From the mid-nineteenth to the mid-twentieth century, population growth was highest in the territories of overseas settlement, such as Australia, the United States, and Canada, all of which recorded rates of growth of over 19 percent per decade.27 Between 1871 and 1941 the Canadian rate of growth was 1.64 percent per annum. In the Maritimes it was only 0.55 percent compared with 1.0 percent in Newfoundland between 1869 and 1935. The Maritime share of the national population fell by 50 percent, compared with 25 percent in Ontario and 9 percent in Quebec.28 In the United States, where a comparable westward shift took place, there was not an equivalent imbalance of regional population growth. Between 1860 and 1950, the northeast's share of population declined by 22 percent and the South's by only 12 percent.29 The labour force in the Maritimes also fell during this period, from 18 percent of the Canadian in 1891 to 9 percent in 1941. Between 1891 and 1911 the Maritime labour force grew by only 0.3 percent compared with a rate five times greater in Ontario and Quebec, and between 1911 and 1941 the absolute and relative performance was no better. In international perspective the Maritimes were also poor performers; between 1913 and 1938 small countries like Denmark, the Netherlands, Norway, and Sweden increased the size of their labour forces by 27 percent to 49 percent compared with less than 14 percent in the Maritimes, which ranked with larger, troubled countries like Belgium (4 percent), Italy (9 percent) and Prance (—11 percent).30 In Newfoundland, however, the labour force actually grew faster between 1891 and 1911 (1.9 percent per annum) than in Ontario and Quebec, and in the period 1911-41 at a rate close to that of Ontario.31

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Table 1: Labour Force Distribution (percent) 1901 Canada 42 Maritimes 47 Nova Scotia 44 New Brunswick 47 Prince Edward Is. 67 Newfoundland 65 Ontario 41 Quebec 39

Primary 1941 Change 27 -15 31 -16 25 -19 31 -16 59 -8 33 -32 19 -22 22 -17

Industry 1901 1941 Change 31 32 1 28 31 3 30 35 5 29 31 2 15 12 -3 26 30 4 32 37 5 34 37 3

Services 1901 1941 Change 27 41 14 25 38 13 26 40 14 24 38 14 18 29 11 9 37 28 27 44 17 27 41 14

Source: Census of Canada, 1941; Tenth Census of Newfoundland and Labrador, 1935; and Dominion Bureau of Statistics, Province of Newfoundland: Statistical Background (Ottawa, 1949), table 81. Note: "Industry" includes logging, mining, manufacturing, construction, and unspecified labourers. "Services" includes all professional and personal service employment, trade, finance, clerical, public service, transport, and communications. "Primary" therefore includes only agriculture, fishing, and trapping. The terminal date for Newfoundland is 1945. For 1901 in Newfoundland, 10 percent of those enumerated as "otherwise employed" are assumed to be in transportation and communications (the 1935 share) and are allocated to services. All calculations omit those without stated occupations.

Although Newfoundland's population and labour force grew substantially faster than that in the Maritimes, this is not unequivocal evidence of a more satisfactory economic performance. The utilization of the labour force on the island is almost impossible to measure, and there were also more formidable barriers to emigration. The faster growth might indicate nothing more than an increasingly impoverished population, both absolutely and relatively. If this were so, it should be revealed in the structural stagnation of the labour force. In 1901, as Table 1 reveals, the distribution of labour force in the Maritimes was much more concentrated in agriculture and fisheries than was the case in Quebec and Ontario, with relative underrepresentation concentrated more in the industry than the services sector. Between 1901 and 1941 the reallocation of labour from primary industries proceeded rapidly in Ontario but at about the same rate in the Maritimes and Quebec. Quebec had the most "modern" distribution in 1901, but the lead had passed to Ontario by 1941. The most dramatic labour force shifts, however, occurred in Newfoundland. While labour force allocation to the industrial sector in 1901 was not massively below that of the two large Maritime provinces, service-sector employment was strikingly under represented. Between 1901 and 1945 there was a major shift of

244

D. Alexander Table 2: Labour Force Location Quotients Maritimes Newfoundland Agriculture Fishing Logging Mining Manufacturing Construction Transport Trade and finance Professional Clerical

1911

1941

1911

1945

0:97 10:17 1:50 2:66 0:66 0:80 1:03 0:78 0:96 0:75

1:30 2:26 2:14 2:58 0:52 0:93 1:13 0:86 1:19 0:62

16:40 — 2:17 1:32 0:50 — — 0:20 1:03 1:40

13:90 — 2:89 1:07 0:33 1:03 0:99 0:80 1:36 0:54

Source: Census of Canada, 1941; Census of Newfoundland and Labrador, 1935 and 1945. Note: The location quotient is LQ = (Si/S)/(Ri/R), where Si is the number in the industry in the region, S the number in the industry in the nation, Ri is the number in the regional labour force, and R the number in the national labour force. The "nation" includes Newfoundland, the Maritimes, Quebec, and Ontario.

labour out of primary activities, a growth in industry employment equivalent to that on the mainland, and a massive gain in service employment. This latter phenomenon reflected the expansion of the transportation and communications system on the island, as well as the rapid development (from a rather backward starting point) of modern educational, health, and public service facilities. A three-sector analysis of labour force distribution is, of course, a blunt instrument of analysis. Table 2 calculates labour force location quotients for a more detailed breakdown, wherein a value in excess of 1:00 indicates a specialization greater than would be expected given the region's share of the total labour force.32 In this case the regions are the Maritimes and Newfoundland while the "nation" includes these and central Canada.33 In 1911 the Maritimes had a roughly balanced share of employment in agriculture, transportation, and professional services. Not surprisingly, they had a disproportionately large share of fishing employment and a less dramatically large share of logging and mining employment. On the other hand, they were underrepresented in manufacturing employment and in construction, which may be taken as an index of fixed capital investment, and trade and financial activity, which may be an index of entrepreneurial activity. Between 1911 and 1941 the disproportionate concentration in fishing was modified, but otherwise the heavy

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specialization in primary activities solidified, and the manufacturing ratio deteriorated. The disproportionate share of professional employment reflects the large educational and health establishment relative to the labour force which remained in the region, and perhaps the tendency for the region's middle class to concentrate in socially prestigious professions when entrepreneurial opportunities were poor. In Newfoundland, the fragility of the 1911 census invites caution in intertemporal comparison, although the data do suggest an equivalent structural development to the Maritimes. By the 1940s both subregions of the "nation" were well established as producers and transporters of primary products, and dependent upon the central subregion for finished goods and entrepreneurial and associated labour force activity. Since population and labour force data are inconclusive indices of relative economic growth, it is essential to compare output data. The difficulty here is that no compatible set of output statistics exists. For the Maritimes, the most satisfactory are Alan Green's gross value added (GVA) series for 1890, 1910, 1929, and 1956. No comparable series exists for Newfoundland, and the prospects for creating one are doubtful. The only recent estimate of output is a limited three-sector gross value of production (GVP) series prepared by the Royal Commission on the Economic State and Prospects of Newfoundland and Labrador for various years between 1891 and 1948.34 Therefore, in order to compare Newfoundland and Maritime development it is necessary to create a new set of indices. Tables 3 to 5 provide a GVP series in five goods-producing sectors for Newfoundland, the Maritimes, and Canada, using published Dominion Bureau of Statistics estimates for the mainland, and a wider variety of sources for the island.35 Tables 6 and 7 attempt to compare real output growth rates and sectoral contributions to real output growth for the three economies. There are a number of limitations surrounding the use of these data. It proved impossible to create long-term estimates of output in construction, electric power, transportation, and the service industries. The assumption, nonetheless, is that this more limited series will serve as a proxy of the comparative rate of growth of the three economies and that there is no serious distortion of the progress of one against the others.36 Secondly, since the estimates are of GVP rather than GVA, the absolute values must be used with caution as indicators of comparative productivity and wellbeing.37 Thirdly, the series have been deflated by the general wholesale price index to estimate the value of real output growth. While the use of sectoral deflators would more accurately estimate real GVP in Canada and the Maritimes, whether this would also be true for Newfoundland is less certain. It is true that the Island's growing dependence on Canada and the competitive nature of much of its output, suggests that Canadian sectoral deflators would be appropriate. But on crude data, a crude deflator seemed less risky than a finer one. Finally, the early 1880s was chosen as the initial date because of data limitations before that decade. The terminal year of 1939 was adopted because the war had a

246

D. Alexander Table 3: Gross Value of Production: Newfoundland ($000 1935-9)

1884 1891 1901 1911 1921 1929 1939

Agriculture 1,245 1,693 3,383 5,368 6,116 6,318 7,980

Forestry 214 447 755 1,396 3,386 14,581 14,928

Mining 761 935 1,513 1,931 446 3,003 8,903

Fish 9,456 9,220 12,242 13,119 7,846 12,867 6,869

Manufacturing 2,520 2,175 3,311 3,982 4,320 6,711 9,596

Total 14,196 14,470 21,204 25,796 22,114 43,480 48,276

Per capita 72 72 96 106 84 156 160

Note: Agricultural output, 1891-1921, derived from Department of Overseas Trade, Industries and Resources of Newfoundland for 1925 (London, 1926), 14. These estimates include the value of the animal stock, which in 1921 was about 4.0 percent of the value of field crops and animal products. Census returns indicate that the ratio of animals to field crop production was relatively constant, and hence the Department of Trade estimates for 1891 to 1921 have been deflated accordingly. Output in 1884 is estimated by the value of output in 1891 weighted by the relative physical productivity of field crops in the two years. For 1929 the estimate is the 1935 field crop output plus the 1921 animal products ratio. For 1939 as given in Newfoundland Industrial Development Board, Industrial Survey (St. John's, 1949), 1:92. All other sector estimates derived from Newfoundland, Journal of the House of Assembly, Customs Returns, and Census of Newfoundland and Labrador, 1884, 1891, 1901, 1911, 1921, and 1935, and for 1939 as estimated in Industrial Development Board, Industrial Survey, 1:92. The forestry sector includes only lumbering and pulp and paper. The manufacturing sector is net of pulp and paper. The fishing sector includes an estimate for domestic consumption. All estimates deflated by the general wholesale price index for Canada in Urquhart and Buckley, eds., Historical Statistics of Canada, series J34, and for mining J35.

powerful stimulative effect on both Newfoundland and the Maritimes which inflates the historic growth performance prior to Newfoundland's entry into Confederation. For any of the economies it may be argued that some other date would be more appropriate than the one chosen. This objection is insurmountable unless one has annual estimates of output, or some other index of trade cycle behaviour. In their absence, and given the close relationship among the three economies, the decision was made to measure at common dates. The value of any decennial comparison is doubtful; but the approach should not seriously compromise conclusions drawn from growth rate calculations of over sixty years, or even for subperiods of thirty years. What were the sectoral and aggregate growth patterns in these three economies? It is logical to begin with agricultural production, where New-

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Table 4: Gross Value of Production: Maritimes ($000 1935-9).

1880 1890 1900 1910 1920 1929 1939

Agriculture 41,956 40,222 58,763 71,447 81,283 87,726 77,241

Forestry 13,297 16,194 17,199 26,619 22,317 21,160 30,164

Mining 3,115 6,112 14,424 18,683 18,235 26,301 31,198

Fish 14,918 15,465 20,253 19,627 9,183 14,976 14,935

Manufacturing 42,626 71,978 56,414 85,915 105,642 108,354 124,120

Per Total capita 115,912 133 149,971 170 167,053 187 222,291 237 236,660 237 258,517 259 277,658 252

Note: Agricultural output 1900-39 from Canada Year Book, 1914, table 9; 1924, 203-4; 1934-5, 254-5; 1941, 152-3. For 1880 and 1890, OJ. Firestone, Canada's Economic Development (London, 1958), table 69, 193, estimate of Canadian agricultural gross value of production. For Maritime share, Maritimes share of occupied farms in Canada weighted by the relative productivity in 1900 as estimated from Canada Year Book, 1914, table 9. Forestry sector includes lumber and pulp and paper, from Canada, The Maritime Provinces since Confederation (Ottawa, 1927), 60-1; and Canada, The Maritime Provinces in Their Relation to the National Economy of Canada (Ottawa 1948), 68-9, 73. Mining from Maritime Provinces in Relation, table 30, 85-8. Fisheries is marketed value from Maritime Provinces in Relation, table 13, 58. Manufacturing is net of lumber and pulp and paper as calculated from Maritime Provinces in Relation, table 36, 98-100. All estimates deflated by the general wholesale price index for Canada in Urquhart and Buckley, eds., Historical Statistics of Canada, series J34, and for mining J35.

foundland has always faced a comparative weakness. In 1880 agricultural output represented 44 percent of goods production (excluding construction) in Canada, 36 percent in the Maritimes, and only 9 percent in Newfoundland.38 By 1939 the relative contribution of agriculture to output had declined by 48 percent in Canada but by only 22 percent in the Maritimes. In Newfoundland, however, the government launched a major initiative at the turn of the century to stimulate food production and, despite the climate and soil conditions, output expanded under the watchful eyes of a myriad local agricultural societies and a newly established Department of Agriculture from 9 percent of goods production in 1884 to 21 percent in 1910. In subsequent decades the relative share fell as other sectors of the economy expanded rapidly, but in 1939 agricultural output still accounted for a respectable 17 percent of goods production.

248

D. Alexander Table 5: Gross Value of Production: Canada ($000 1935-9)

1880 1890 1900 1910 1920 1929 1939

Agriculture 369,080 456,035 647,435 924,840 739,175 1,309,055 1,182,770

Forestry 45,960 76,900 88,225 101,565 218,300 313,780 311,400

Mining 14,125 26,290 97,805 123,150 103,230 220,385 441,210

Fish 20,195 26,400 34,550 28,170 24,235 38,365 40,480

Manufacturing 385,345 623,205 682,700 1,383,760 1,605,790 2,802,960 3,198,485

Per Total capita 834,705 192 1,208,830 250 1,550,715 289 2,561,485 355 2,690,730 306 4,684,545 467 5,174,345 459

Note: For the forestry sector, sawmilling, pulp and paper production estimated as 60 percent of "Wood Products" in OJ. Firestone, Canada's Economic Development, 18671953 (England, 1958), table 78, 213. For 1900 and 1910, Canada Year Book, 1924, 293-4, 296. For 1920-39, Canada, The Maritime Provinces in Their Relation to the National Economy of Canada, tables 20 and 24, 69, 74. Agricultural output, 18801920, as in Firestone, Canada's Economic Development, table 69, 193. For 1929 and 1939 farm output as in Canada Year Book, 1934-5, 254-5; and 1941, 152-3. Mining for 1880-90 as in Canada Year Book, 1941, xiv-xvi plus coal. For 1900-39 all metallic and nonmetallic production excluding cement as in Urquhart and Buckley, eds., Historical Statistics of Canada, series N 1-26, N 89-119, N 170. Manufacturing is net of lumber and pulp and paper, as derived from Maritime Provinces in Relation, table 36, 100, Fisheries as in Maritime Provinces in Relation, table 13, 58. All estimates deflated by the general wholesale price index for Canada in Urquhart and Buckley, eds., Historical Statistics, series J34, and for mining J35.

Prom the 1880s into the interwar period, the number of people employed in the farm sector of the Maritimes declined, from 140,000 in 1880 to 96,000 in 1941, or from 18 percent of the population to 8 percent. In Newfoundland the full-time agriculturalist was a rarity, but the absolute number of full-time farmers rose from 1,500 in 1891 to 4,200 by 1935. While this represented only 1.5 percent of the population, the bulk of the country's 35,000 fishermen were also subsistence farmers. In Canada, employment in agriculture rose from 662,000 in 1881 (15 percent of population) to over one million by 1921, after which it stabilized to 1941, representing 9 percent of the population. Thus, over the period the relative commitment of population to agriculture was about the same in the Maritimes as in Canada, but the numbers shrank in the former while they rose in the latter into the interwar period. The number of occupied farms in the Maritimes rose from 78,000 to 113,000 in 1891, after which the number declined steadily. Because of western settlement, farm numbers increased until 1931 in Canada except for the central

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provinces; neither Quebec nor Ontario had significantly more farms at the end of the interwar period than they had after Confederation. Yet, while the trends were the same in the Maritimes and in central Canada, the decline in occupied farms in the Maritimes between 1891 and 1941 was 45 percent compared with only 17 percent in Ontario and 12 percent in Quebec. Nor was this relatively greater loss of farms in the Maritimes compensated by growth in average farm size. Improved acreage per farm was 36 acres in 1871 compared with 48 acres in Quebec and 51 acres in Ontario. By 1941 there had been no significant change in the acreage of the average Maritime farm, but the Quebec farm was by then two-thirds larger and the Ontario farm was twice as large.39 Compared with farms in western Europe, the average Maritime farm was not especially small, for in England in the 1930s improved acreage per farm was 51 acres, in Denmark 39 acres, Germany and Prance 21 acres, and in Sweden 18 acres.40 But European farmers in this period were not very prosperous, and compared with the Maritime farmer they had access to large urban markets and better opportunities for exploiting possibilities of "high farming." Newfoundland farm output grew by over six times, although from an insignificant base of $1.2 million in 1884 to only $8.0 million in 1939. The fastest rate of growth was secured in the 1884-1911 period at 5.6 percent per annum, and this accounted for some 35 percent of the real growth in output for the economy. Clearly, there were important dividends gained from the agricultural program introduced during these years, as well as from the opening of the west coast of the island and improved transportation links to urban markets. In the 1911-39 period, however, the growth rate fell back to 1.4 percent per annum, which reflected both the strong relative growth of other sectors of the economy and the real limits to output imposed by natural conditions and the small urban market. The Maritime output of $42 million in 1880 and $77 million in 1939 was obviously huge compared with Newfoundland's; but the growth performance of the sector was relatively weak. In 1880-1910 output grew at 1.8 percent per annum and in 1910-39 at only 0.3 percent, compared with 3.1 and 0.9 percent for Canada. In the period when the West was opened, it is understandable that Canadian growth should be higher than in a long-established region like the Maritimes. And while a growth rate of only 0.3 percent in 1911-39 might appear dismal, it was no worse than the performance of Quebec and Ontario combined.41 Moreover, through rural depopulation in the 1920s, Maritime farm efficiency drew very close to that of Quebec/Ontario. In 1910 real output per acre in the Maritimes was about $21 compared with $28 in Quebec/Ontario; by 1939 this had narrowed to $24 compared with $2642 The difference in the two farming regions came from the larger average farm size up the St Lawrence, for in 1939 output per farm was $1,726 in Quebec/Ontario and $1,465 in the Maritimes. But if a comparison is made with Ontario alone, the disparities widen. For example, the value of output per head of population in 1939 was I

250

D. Alexander Table 6: Real Output Growth Rates (percent per annum) Manurer Agriculture Forestry Mining Fish facturing Total capita

Newfoundland 1884-1911 1911-1939 1884-1939

5.6 1.4 3.4

7.2 8.9 8.0

3.5 5.7 4.5

1.2 -2.3 -0.6

1.7 3.2 2.4

2.2 2.3 2.2

1.4 1.5 1.4

Maritimes 1880-1910 1910-1939 1880-1939

1.8 0.3 1.0

2.3 0.4 1.4

6.1 1.8 4.0

0.9 -0.9 0.0

2.3 1.3 1.8

2.2 0.8 1.5

1.9 0.2 1.1

Canada 1880-1910 1910-1939 1880-1939

3.1 0.8 2.0

2.7 3.9 3.3

7.4 4.4 6.0

1.1 1.2 1.2

4.3 2.9 3.7

3.8 2.4 3.2

2.0 0.9 1.5

Note: Calculated from Tables 3 to 5. All calculated rates are compound rates per annum and not fitted trends.

in the Maritimes, $62 in Quebec, and $100 in Ontario. Nonetheless, Maritime farming was not a notably deficient sector of the economy, since it grew at a rate comparable to Quebec/Ontario (although not Ontario alone, with its urban market advantages), and the contribution of the sector to the growth of total output was comparable to that for the Canadian economy. If one is searching for explanations of Maritime economic problems in the period, inquiry into the farm sector will not yield large dividends. In Newfoundland's case, there were greater opportunities for gains in output and productivity given the very low initial base. Clearly, some of these gains were being harvested, since output expanded throughout the period at a higher rate than in either the Maritimes or Canada. Difficulties in the forest industry, rather than in the agricultural sector, are more obviously important in explaining sluggish growth in the Maritimes. Towards the end of the century the Maritime lumber industry entered a long period of depression as a result of demand shifts and supply competition. While pulp mills were established in the region in the 1890s, it was not until the late 1920s that newsprint mills were built. In 1911 pulp production represented only 7 percent of lumber output, rising to 55 percent by 1926. In the 1930s expanding pulp and paper output overtook that of the badly depressed lumber sector.

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Table 7: Sectoral Contributions to Real Outout Growth foercent^

Agriculture forestry jvuning jrisn jvianuiacturmg Newfoundland 1884-1911 1911-1939 1911-1939 (excl. Maritimes 1880-1910 1910-1939 1910-1939 (excl. Canada 1880-1910 1910-1939

fish)

35.5 11.6 9.1

10,2 60.2 47.1

10.1 31,0 24.3

31.6 -27.8 —

12.6 25.0 19.5

fish)

27.7 10.5 9.6

12.5 6.4 5.9

14.6 22.6 20.8

4.4 -8.5 —

40.7 69.0 63.6

32.2 9.9

3.2 8.0

6.3 12.2

0.5 0.5

57.8 69.5

Note: Calculated from Tables 3 to 5.

The lumber industry in the Maritimes contracted sharply in the interwar period under the impact of less competitive wood supplies and trade protectionism, and the recovery which emerged in the second half of the 1930s was weaker than in Canada as a whole. In the 1920s the real capital/labour ratio was comparable to the national level, but the output/labour ratio was 20 percent to 30 percent lower.43 In the 1930s the position of both ratios moved sharply against the Maritimes relative to Canada. The efficiency of capital employment (as measured by the output/capital ratio) was also substantially lower in the Maritimes in the 1920s, although it improved in the 1930s. The pulp and paper industry compensated for some of the problems in the lumber sector, but here too output growth was slower than in Canada, as the mills were generally smaller and less efficient.44 These troubles were reflected in the comparative growth rates. Over the period 1880-1939 real output expanded at 1.4 percent compared with 3.3 percent for Canada. In the subperiod 1880-1910 the relative performance was more satisfactory (2.3 percent and 2.7 percent) and it was really in the 1910-39 period that Maritime industry stood virtually still compared with Canada's (0.4 percent and 3.9 percent). Accordingly, while the forest sector accounted for some 6 percent of total output growth in the Maritimes, it contributed some 8 percent to the faster growing Canadian economy. Newfoundland had not possessed the kind of forest resources which had allowed the Maritimes to develop a large lumbering industry at an early stage in their history. In 1873 the country imported over $76,000 of lumber and

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D. Alexander

other forest products against exports of only $7,100.45 Expansion was rapid in subsequent years, however, and by 1901 (before the establishment of pulp and paper) the lumbering labour force had grown from 450 to 1,400, and by 1911 Newfoundland earned a surplus on the nonpulp and paper trade of $63,500.46 Depressed markets for lumber in the interwar period, however, meant that the mills were forced back into dependence upon domestic consumption. Most of these mills were small, two-employee, and part-time operations; while there were a handful of large mills each employing several hundred, the 534 licensed mills in 1929 only produced some $400,000 of lumber, compared with the $15.5 million of the 650 Maritime mills.47 In 1938 lumber output was still only $450,000 and at the end of the interwar period net imports of lumber were about 20 percent of the value of domestic output.48 The transformation of Newfoundland's forest industry came with the establishment of pulp and paper capacity. The big newsprint mill opened at Grand Falls in 1910 produced $1.2 million of products compared with $1.5 million in the twelve Maritime pulp mills; and with the addition of the Corner Brook mill in 1925 Newfoundland's output equalled that of the Maritimes. In 1938 the two Newfoundland mills employed only 70 percent of the employees, but paid out in wages and salaries 90 percent of the compensation paid by Maritime mills. The average wage was 27 percent higher in Newfoundland than in the Maritimes and 21 percent higher than in Canada,49 and this high wage characteristic has persisted to the present.50 It was for no idle reason that a good job in Newfoundland was known as a "Grand Falls job." The expansion of output for the domestic lumber market, the development of the large packaging industry for the fishery, and the spectacular growth of pulp and newsprint in the twentieth century were reflected in the industry growth rate for Newfoundland. Beginning from a low base, the forest products sector grew at a rate of 7.6 percent per annum to 1901 (prior to the first newsprint mill) and by 8.9 percent in the 1911-39 period. The sector accounted for nearly half of non-fisheries goods-production growth in the period, and nearly a third of the value of measured goods production by 1939. Even though the industry was foreign owned and purchased substantial inputs from outside Newfoundland, in 1935 wages paid in logging and paper manufacturing probably accounted for up to 25 percent of earnings in the economy.51 In 1880 forest products accounted for only 1.5 percent of good production in Newfoundland compared to 5.5 percent in Canada and 11 percent in the Maritimes. In subsequent decades, the relative importance of the sector in the Maritimes was unchanged, while it rose modestly to 6.0 percent in Canada, and rose enormously in Newfoundland to 5.4 percent in 1910 and 31.0 percent in 1939. The sector offered a major net addition to output in Newfoundland, whereas in the Maritimes pulp and paper mainly offset the decline of the lumber industry. The mining industry, because of its instability and harsh working conditions, has had a greater social and economic impact on the Atlantic region than is

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reflected in its contribution to output. In 1880 mining contributed 5 percent of goods production in Newfoundland, 3 percent in the Maritimes and 2 percent in Canada; by 1939 these shares had risen to 18 percent, 11 percent, and 9 percent respectively. Nova Scotia dominated mining in the Maritimes with gold, gypsum, and coal. It was the latter, of course, which gave Nova Scotia its prominence, and coal production was never less than 80 percent of total mineral output. In the 1880s and 1890s Maritime mineral output was close to 25 percent of the Canadian total, but with expansion in northern Quebec and Ontario, Alberta, and British Columbia, this share fell to 15 percent in 190010 and to 7 percent by 1941. It is less well known that Newfoundland was an important mineral producer by the last quarter of the nineteenth century. The Notre Dame Bay copper mines, opened in 1864 and operated until 1917, made the country the fourteenth largest copper producer in the world.52 This was followed by the opening of the Bell island iron mines in 1895, which quickly came to account for some two-thirds of mineral exports. Exports had fallen to about 40 percent by the end of the 1930s, reflecting both uncertain markets for iron ore, and the opening of the base metal mines at Buchans in 1928 and the fluorspar mine at St Lawrence in 1933. In the 1880-1910 period, world output of the major metallic, nonmetallic, and mineral fuels was growing at 4.5 percent per annum.53 Expansion in Canada (7.5 percent) and the Maritimes (6.1 percent) was substantially in excess of world growth, but it was lower in Newfoundland (3.5 percent). In 1910-39, however, while world output expansion fell to 2.3 percent, the Canadian rate remained substantially higher (4.4 percent). In the Maritimes, the coal industry confronted growing competition from the United States as well as the postwar shift to alternative fuels, and this, combined with the absence of major new mining developments, yielded a comparatively slow rate of growth (1.8 percent). In Newfoundland, on the other hand, the new ventures opened in the interwar years, combined with the high productivity of the Wabana iron fields, generated a growth rate (5.7 percent) substantially above both world and Canadian levels. Mineral output per head was normally substantially higher in the Maritimes than in Canada until the interwar period. It was then that the relatively poor growth performance began to tell, and by 1941 output was about $26 per person in the Maritimes compared with about $40 for Canada. Until the 1930s Newfoundland's output per head was substantially lower than in either Canada or the Maritimes, but with output of some $22 per head in 1941 the country was pointed towards its postwar stature as the major mining centre of the Atlantic region. In Canada the growth of mining output contributed some 12 percent to total growth of goods production, but in the Atlantic region it was much more important at 20 percent in the Maritimes and 24 percent Newfoundland. While Newfoundland's growth rate substantially exceeded that of the Maritimes and Canada in 1911-39, the expansion of the industry did not

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generate the same local benefits that the forest products sector had. While the sector accounted for 18 percent of goods production in Newfoundland in 1939, it accounted for less than 5 percent of total earnings in 1935.54 The major structural difference between Newfoundland and the Maritimes is revealed in the relative dependence of the two economies on the fishing industry. In 1884 some 67 percent of goods production in Newfoundland was accounted for by fish products, compared with only 13 percent in the Maritimes and 2 percent in Canada. If fishing and agriculture are combined, the difference in relative dependence on primary activities narrows (75 percent and 50 percent) but remains striking and emphasizes the vulnerability of Newfoundland's dependence upon a one-product export economy. By 1910 the fishery contribution to output had fallen to 51 percent in Newfoundland and 9 percent in the Maritimes, and by 1939 (reflecting the interwar depression in the industry) to 14 percent and 5 percent respectively. By that time the Maritimes were relatively more dependent upon fisheries and agriculture than was Newfoundland (33 percent compared with 31 percent), although that also reflected the comparative poverty of arable food production on the island. Large and old industries, like the Atlantic fishery, are often characterized by relatively low rates of growth, and this was certainly the case with the fishing sector. In Newfoundland in 1884-1911 fisheries output grew by only 1.2 percent and in the Maritimes at less than 1.0 percent per annum. It was in 1910-39, however, that the industry was overwhelmed by troubles. In Newfoundland real output growth contracted at a rate of —2.3 percent and in the Maritimes at almost —1.0 percent per annum. The industry was extraordinarily dependent upon international trade, and returns to production factors were especially sensitive to the host of interwar disturbances, including the postwar inflation, rising protectionism, the Depression, and the collapse of the multilateral payments system in the 1930s. Compounding these external problems was a highly conservative and defeatist approach to potential changes in product, catching, and marketing on the part of industry and government.55 The less poor performance of the Maritimes reflected their greater product diversification and access to the American market; Newfoundland was much more dependent upon saltfish and the highly competitive and disturbed European markets. Given the unusual importance of the industry to the Newfoundland labour force, and hence to the revenues of the government, its virtual collapse in the interwar period seriously compromised the gains which were won from expansion of other sectors of the economy. Thus, whereas in the Maritimes the fisheries contraction was —8.5 percent of total output growth over the 1911-39 period, in Newfoundland, it was —27.8 percent. Economic policy in Newfoundland consistently focused upon developing and expanding resource sectors. In the Maritimes there were much greater expectations for manufacturing. The contribution of manufacturing (excluding lumber and pulp and paper throughout this discussion) to the three economies

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in 1880 ranged from a low of 18 percent of goods production in Newfoundland to 37 percent in the Maritimes and 46 percent in Canada. By 1939 this had risen only to 20 percent in Newfoundland, but it was now 45 percent in the Maritimes and 62 percent in Canada. Relative to Canada, therefore, the contribution of manufacturing to total output had declined over the period in both Newfoundland and the Maritimes. In 1880 current dollars, manufacturing gross value was $40 per capita in the Maritimes, $60 in Canada, and only $10 in Newfoundland. By 1890 the Maritimes relative position improved from 63 percent of the Canadian level to 68 percent, with a per capita production of $67. Much of this output consisted of unsophisticated raw material processing and small shop output (as it did everywhere at this time); nonetheless, the Maritimes and Canada ranked favourably with other countries in the world. While such comparisons are fraught with difficulties, the order of achievement is suggested by an 1888 output per head (in $ U.S.) of $117 in the United Kingdom, $65 in France and Germany, $50 in Sweden and the Netherlands, and as little as $25 in Italy and Spain.56 Although there are special difficulties with the Newfoundland data which lead to underestimation of finished goods production, clearly it was not a significant manufacturer by any standard.57 By 1937 the Maritimes' relative position had changed dramatically. Per capita output in that year was $140, compared with $80 in Newfoundland and $330 in Canada. Between 1890 and 1937, therefore, the Maritimes' position relative to Canada had fallen from 68 percent to 42 percent, and it had even deteriorated against Newfoundland. In the United Kingdom in 1935 output per head was $290, in Germany $285, and in Italy about $115.58 If basic iron and steel manufacturing is removed from the Maritime data, then its output per head falls to $95, which is not substantially in advance of the Newfoundland level. Between 1880-1910 real manufacturing output grew at 2.3 percent per annum in the Maritimes compared with 4.3 percent in Canada.59 In the 1880s the Maritime growth rate was probably higher than Canada's (about 5.4 percent compared with 4.9 percent), but it fell below the Canadian performance in the 1890s and substantially so in 1900-10 (4.3 percent and 7.3 percent). Manufacturing's contribution to total output growth was only 41 percent in the Maritimes compared with 58 percent in Canada. In the 191039 period, Maritime real output grew at a much lower rate than before the war, and at only half the Canadian rate (1.3 percent and 2.9 percent). The 1920s was an especially bad period for the Maritimes, with a growth of only 0.3 percent compared with 6.1 percent in Canada. Still, in the badly depressed interwar economy of the Maritimes, this slow-growing manufacturing sector still accounted for 69 percent of total output growth, which was almost the same as in Canada. It is well established that Maritimes manufacturing stagnated after the war. While their position relative to Canada was not one of equality at the be-

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ginning of Confederation, the Maritimes were relatively strong both nationally and internationally. Except in the 1880s, however, nonforest-products manufacturing grew much more slowly than in Canada and the world, leaving the region more backward by the end of the interwar period than it had been in the last quarter of the nineteenth century. Newfoundland had no significant manufacturing capacity in the 1880s, and despite tariff barriers that came to exceed Canadian levels, it did not have a large per capita output by 1939. Nonetheless, in the 1910-39 period, the country achieved a rate of growth of nonforest-products manufacturing equal to that of Canada's, and by 1947 domestic production of manufactures accounted for 25 percent of domestic consumption.60 With the removal of the tariff barriers in 1949 much of this capacity was wiped out; but in a few product lines local firms were able to meet the competition and even export to the mainland. Thus, even in Newfoundland it was possible for efficient secondary manufacturing to locate and produce for the national market. This review of growth in five key sectors of the Atlantic economy now allows for a general answer to the question posed: How did Newfoundland's economic growth compare with that of the Maritimes in the decades prior to its union with Canada? A succinct answer is possible. In both 1880 and 1911 goods production in Newfoundland was about 12 percent of the Maritime level, but by 1939 it had increased to about 20 percent. Relative to Canada, the Maritimes accounted for 14 percent of goods production in 1880, 9 percent in 1911, and 5 percent by 1939. The Maritimes economy, therefore, shrank relative to both Newfoundland's and Canada's. Behind these trends in relative size lie the growth rates for goods production in the three economies. In the 1880-1910 period Newfoundland and the Maritimes grew at the same rate (2.2 percent), which was 50 percent less than the growth rate in Canada (3.8 percent). A. Maddison has estimated the growth of gross domestic product (GDP) in twelve European and North American economies over the years 1870-1913 to average 2.7 percent per annum, ranging between 1.4 percent for Italy and 4.3 percent for the United States.61 If our estimates of goods production parallel that of GDP, then the results suggest a pace of development in the Atlantic region more akin to that of the large and developed economies of western Europe than the North American territories of settlement.62 In the 1910-39 period growth everywhere in the world was slower than in the preceding decades. For example, total output in Denmark, Sweden, and the Netherlands expanded by some 2.2 percent per annum and in Norway at a somewhat faster rate of 2.8 percent.63 In Canada and Newfoundland, goods production expanded by 2.4 percent per annum, a rate three times greater than that achieved in the Maritimes.64 Although the Canadian rate was equalled by Newfoundland's, on a per capita basis Newfoundland's was consistently the least productive of the three economies. In 1884 with $72 per capita of goods production, it stood at only 54 percent of

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the Maritimes and 40 percent of Canada. By 1910 Newfoundland's position relative to the Maritimes had fallen to 45 percent and relative to Canada to 34 percent. But the industrial developments of the 1910-39 period reversed this trend, and in 1939 Newfoundland's per capita output relative to the Maritimes had improved sharply to 64 percent. Still, with goods production in 1939 of only $160 compared with $460 in Canada, it is obvious that the island was extremely vulnerable to the kind of trade and financial crisis which overwhelmed it in the 1930s. In terms of growth performance, it is also apparent that Newfoundland was developing from its low initial base at a more satisfactory pace than the Maritimes secured from its stronger initial position. Both communities were growing at a per capita rate on the level of Maddison's twelve countries in the period 1870-1913. But between 1910 and 1939 per capita growth in Newfoundland was higher than in Canada (1.5 percent and 0.9 percent), while in the Maritimes there was little real per capita growth in the goods producing sector (0.2 percent). The sectoral contributions to aggregate growth in the Newfoundland economy were characterized by a major shift after the turn of the century. In 1884-1911 a third of the growth of output was gained in the agricultural sector, another third in fisheries, and the remainder was spread relatively evenly across forestry, mining, and manufacturing. Agricultural contributions to growth were only slightly less important to the Maritimes and Canada, but the major sectoral contribution for both came from manufacturing. In the Maritimes, however, manufacturing provided only 40 percent of the contribution to total output that it did in Canada, with forestry, mining, and fishing contributing much larger shares. In the 1911-39 period, negative growth in the fisheries was a major drag on output growth in Newfoundland, as it was in the Maritimes. Almost half of positive contributions to Newfoundland output were accounted for by the lumber and paper industry, and another quarter by mining. The relative contribution of manufacturing fell in this period, and the gains from the agricultural sector were modest. In the Maritimes and Canada, both agriculture and forestry were minor contributors to output growth, as was mining for Canada. Manufacturing in Canada, however, contributed over two-thirds of the growth in the period, whereas it added 20 percent less in the Maritimes. On a net value of production basis, of course, the contribution of the manufacturing sector would be substantially less; but the data do pinpoint the relative weakening of finished goods production in the Maritimes relative to Canada. Thus, the rapid rate of growth in Newfoundland had its origins in the expansion of two new resource sectors. Had these sectors not developed when they did, the economic troubles of the country would have been still more terrible. In the Maritimes the resource sectors had undergone earlier and more substantial development, and the region could not look to these areas for fresh impetus to growth. Manufacturing growth was essential to the development of the Mar-

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itimes if they were to maintain their stature within Canada and relative to Newfoundland. This was not accomplished, and while the sector contributed almost 60 percent of output growth in the 1910-39 period, it was a contribution to a real growth in total output that was absolutely and relatively very small. A postwar estimate of Newfoundland's per capita national income for the years 1936-9 showed it to be only 62 percent of the weighted average of the Maritime provinces.65 This was probably a substantial relative improvement over what it had been some sixty years earlier. In 1880 Newfoundland was structurally backward in terms of its labour force and output distributions. Much of the responsibility for this lay in the natural obstacles to food production, for if the same per capita production had been achieved in Newfoundland (output in other sectors remaining the same), per capita goods production would have been 86 percent of the Maritimes' level rather than 54 percent. Given the low productivity levels in the fishery, it is reasonable to believe that output in other sectors would not fall under such an assumption. Indeed, given an adequate agricultural base, there is little doubt that population would have been larger, monetization of the economy more pervasive, and incomes substantially higher in all sectors. The effort that was made to raise agricultural output was important, but there was nothing Newfoundland could do about the weather and the soil. The task before the country was to overcome this natural disadvantage by maximum efficiency in other sectors. In the 1884-1911 period, although the impact of modernization and diversification efforts had little quantitative impact, by Canadian, Maritime, and western European standards the growth of goods production was at a reasonable rate.66 Population growth, however, absorbed a large share of this with the consequence that output per capita in 1911 was lower relative to that of the Maritimes and Canada than it had been in 1880. For Newfoundland, the 1884-1911 period was one of extensive growth within the traditional economic framework, notwithstanding the industrial developments which dominated the final years of the period. Unless one posits major changes in the general level of education and the quality of entrepreneurship, it is difficult to see how in this period Newfoundland could have developed at a more satisfactory rate than it did. The Maritime economy was more sophisticated and prosperous in 1880 than Newfoundland's, with a per capita output closer to the Canadian average than Newfoundland's. The major economic advantages which the region enjoyed were the early commercial potential of its agricultural and forestry resources, and its location closer to the markets and stimulus of the fast-growing eastern seaboard of the United States. While goods production did not grow any faster in the Maritimes than in Newfoundland, the ease of emigration lowered population growth, and in 1911 per capita goods production relative to Canada was only three percentage points lower than it had been in 1880. With its already highly developed primary sectors, the Maritimes had to rely more

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upon expansion in finished goods or export sales of services, such as shipping, to maintain or improve their position. But the shipping industry collapsed and manufacturing output expanded at little better than half the Canadian rate. While the roots of the changes lay in the earlier period, a major break with the past was visible in both Newfoundland and the Maritimes in the 191039 period. Newfoundland began rapidly to assume its modern character as a major resource production centre, with an aggregate growth of output which matched that of Canada. Heavy emigration in the 1920s generated a per capita growth in goods production which was substantially higher than in Canada. The country's major failure, however, lay in the fisheries sector. Spectacular rates of growth could not be expected in the difficult trading climate of the 1920s and 1930s, but a long-term growth between 1910 and 1939 of at least 1.5 percent per annum was possible for an efficient and imaginative fishing country.67 If such a growth rate had been achieved (making no adjustments for population growth or linkage impacts on other sectors), total per capita output in 1939 would have been $237 rather than $160, representing 52 percent of the Canadian level rather than 35 percent. Yet, whatever opportunities were missed in Newfoundland in this period, its overall performance was exceedingly good compared with that of the Maritimes, where on both a total and a per capita basis goods production fell drastically relative to that in Canada and Newfoundland. No sector of the economy which was measured grew at as much as half the rate of the equivalent Canadian sector, or even close to the rates in Newfoundland. The obvious question is whether this performance was in some way inevitable. The Maritimes' agricultural sector was not markedly inferior to Ontario's and by some measures somewhat better than Quebec's. The slightly higher growth of output for Canada was largely attributable to the residue of western expansion. Unlike the situation in Newfoundland and much of Canada, the forestry sector was already a mature industry. Newsprint manufacturing was relatively slow in coming to the Maritimes and, while higher growth was a possibility in the sector, the rate of growth recorded in Newfoundland was not. The mining growth rate was the highest in the Maritime economy, due partly to coal subsidies, but unlike Newfoundland, Quebec, Northern Ontario, and the West, there were no mining frontiers to be opened in the Maritimes. Fisheries production was as badly handled in the Maritimes as it was in Newfoundland but it was also relatively less important to the total or per capita growth rate. Thus, while margins for gains exist in any sector in any economy, it is clear that if the Maritimes were to maintain their relative wellbeing and stature within the country, this had to be secured in the finished goods sector. If in the 1880-1910 period manufacturing output had grown at the national rate, then the real value of output in 1910 would have been $130 million rather than $85 million. If one also allows Maritime population to grow at the national rate, then total output per head in 1910 would have been $384 rather

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than $274. Making no allowances for interindustry effects, total output per head would have been 77 percent of the national level rather than 67 percent. If one projects the same assumptions through the 1910-39 period, the effect is to raise per capita goods production to 84 percent of the Canadian level as compared with the 55 percent which existed. The least important objection to this extrapolation is that expansion in manufacturing output would mean less output in other sectors, leaving the Maritimes with a different distribution of output but not with any major gains in total and per capita output. The Maritime economy in this period, however, was not burdened with factor supply constraints (assuming that national financial institutions were indeed national) and the likely effect of manufacturing growth at the national rate would be a regional output and income growth path which converged towards national equality. But having posited that as a reasonable prediction, was it possible for the Maritimes to achieve the Canadian rate of growth in manufacturing? The truthful answer is that we do not know, and perhaps in the historical sense it is unknowable. Keirstead, as we noted, argued that over most manufacturing sectors there were growing diseconomies to location in the Maritimes for the national market. R. George has presented arguments that the cost disadvantages are insignificant today, which does not prove that they always were. Apart from the 1880s the rate of growth of manufacturing output in the Maritimes was substantially lower in both 1880-1910 and 1910-39, with the interwar years being those when most of the trouble was concentrated. Acheson's work indicates a far from hopeless prospect for Maritime manufacturers up to World War I, and in many industries there was real strength. Forbes' analysis of the transportation issue strongly suggests that the absorption of the Intercolonial Railway into a national system, and the resulting loss of regional control over freight rates, killed any hopes of maintaining or strengthening manufacturing in the interwar period. The possibility that economic decline was a reflection of local entrepreneurial lassitude has been undercut by David Frank's study of the stunning ineptitude of the distinguished external management of one major Maritime industrial complex.68 Until much more work is done, the best conclusion is that manufacturing in the Maritimes for the national market did involve locational costs, but that it was rendered virtually impossible by national transportation policy and the absence of national incentives to overcome the disadvantages. If one accepts that a basic objective of any country is to equalize opportunities across the land and to implement policies which ultimately turn regional diseconomies into positive advantages, then the legitimate grievance of the Maritimes is that there was no place for it in twentieth-century Canada. The evidence is unmistakable that, despite remaining outside the Canadian economic and political union, population and output grew faster in Newfoundland than it did in the Maritimes. Does it therefore follow—and this was our second question—that Newfoundland gained from standing apart, and that

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development in the Maritimes was retarded by its earlier absorption? Indices of economic growth do not provide a conclusive answer. It is possible to argue, for example, that Newfoundland's growth rate would have been even higher as a province of Canada, as a consequence of a better supply of infrastructure and a more attractive and stable climate for Canadian and foreign investment. The historical experience of the Maritimes, however, does not encourage such predictions. It is impossible to know how the Maritimes would have responded to a less open economic and political environment. The romantic hypothesis is to predict a burst of creativity, as a function of the concentration of skills and energies occasioned by real and patriotic constraints on the migration of labour and capital. The pessimist would predict stagnation at higher aggregate, but lower per capita, income. Despite the impressive growth performance of Newfoundland during its years of political independence, its history does not support the romantic interpretation. It is true that aggregate output grew faster in Newfoundland, and that there was some catching up in terms of output and income per capita. But little of that is obviously attributable to the genius of the Newfoundland people operating within the constraints and incentives of their own nation state. Newfoundland's stronger growth performance mainly reflected the opening of an unexploited natural resource frontier by foreign corporations. It was principally the impact of rapid development of large newsprint mills and mines that lifted the Newfoundland economy onto a more respectable level relative to the Maritimes. This development was quite independent of whether Newfoundland was a province of Canada or a quasi-sovereign dominion. Indeed, the major domestically controlled sector of the economy, the fishery, was the sector which was the poorest performer and which contributed most to the financial and political collapse of 1933. In the absence of a more creative development of domestically controlled sectors of the economy, Newfoundland in fact paid a price for its political independence. An earlier entry into Confederation would not have quickened the pace of development in foreign enclave sectors. It would not have guaranteed Newfoundlanders a higher rate of return from those resource sectors. It would not have conferred any important social welfare benefits, for these were mainly a product of the postwar years. Certainly, if the Maritimes are to be taken as model, it would not have done anything to spark a more dynamic domestic sector. But it can be said that an earlier entry into Confederation would have relieved the country of its intolerable, externally held public debt which, in the crisis of the Depression, brought the country to its knees. Almost all of this debt had been acquired to support the railway system and to pay for the war effort. With the decline of exports during the early years of the Depression, payments of interest and principal could not be met, and the debt could not be rolled over. Hence, the country collapsed in 1933, lost its dominion status, suffered the ignominy of suspended democratic institutions, and, as a result

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of these things, has harboured a sense of exploitation and vulnerability ever since. The only demonstrably clear lesson from Newfoundland's experience is that very small countries are financially precarious. They survive only if international trade and payments systems are liberal, if they profit from international conflicts, if they avoid, relative to their size, colossal investment blunders, and if, like Iceland, they rely upon internally generated sources of growth and development. Union with a larger country provides an element of stability, and this is a benefit not to be taken lightly. It does not, however, necessarily bring improved opportunities for regional growth and development, as Maritimers well know. In terms of expectations, Maritimers might well be right to complain that Confederation generated disappointing long-term results. But the Newfoundland example of externally generated growth and domestic entrepreneurial stagnation perhaps suggests that the political question is fundamentally uninteresting. If the Dominion of Newfoundland is accepted as the historical analogy, then at least it can be said that Confederation allowed the Maritimes to maintain a shabby dignity.

Notes [1] R.E. Caves and R.H. Holton, The Canadian Economy (Cambridge, Mass., 1961), 145. [2] See E.R. Forbes, "The Origins of the Maritime Rights Movement," Acadiensis (1975) 5(1):55-61. [3] Royal Commission Respecting the Coal Mines of Nova Scotia (1926) and Royal Commission on Maritime Claims (1926). [4] Royal Commission Investigating the Fisheries of the Maritime Provinces and the Magdalen Islands (1928). [5] Royal Commission Respecting the Coal Mines of Nova Scotia (1932). [6] Nova Scotia Royal Commission Provincial Economic Enquiry (1934). [7] Royal Commission on Financial Arrangements between the Dominion and the Maritime Provinces (1935). [8] S.A. Saunders, The Economic History of the Maritime Provinces (Ottawa, 1939). [9] R.D. Rowland, Some Regional Aspects of Canada's Economic Development (Ottawa, 1957). [10] Royal Commission on Provincial Development and Rehabilitation (1944). [11] Royal Commission on Coal (1946).

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[12] As, for example, in the recent study by the Economic Council of Canada, Living Together: A Study of Regional Disparities (Ottawa, 1977). [13] For example, it is unlikely the Department of Regional Economic Expansion would have been established in the absence of political and economic troubles in the province of Quebec. [14] Dalhousie's Institute of Public Affairs was an early contributor to regional studies, and the establishment of the Atlantic Provinces Economic Council and later the Atlantic Development Board contributed enormously to the production of regional studies. [15] Saunders, Economic History. [16] B.S. Keirstead, The Theory of Economic Change (Toronto, 1948), 269-81, [17] E.R. Forbes, "Misguided Symmetry: The Destruction of Regional Transportation Policy for the Maritimes,"in Canada and the Burden of Unity, D.J. Bercuson, ed. (Toronto, 1977), 60-86. [18] T.W. Acheson, "The National Policy and the Industrialization of the Maritimes, 1880-1910," Acadiensis (1971) l(l):3-28; and "The Maritimes and 'Empire Canada,'" Burden of Unity, 87-114. [19] R.E. George, A Leader and a Laggard (Toronto, 1970), 102-5. [20] Newfoundland Royal Commission (1933). [21] R.A. MacKay, ed., Newfoundland: Studies (Toronto, 1948).

Economic^ Diplomatic and Strategic

[22] H.B. Mayo, "Newfoundland and Canada: The Case for Union Examined" (D.Phil, thesis, Oxford University, 1948). [23] P. Copes, The Resettlement of Fishing Communities in Newfoundland (Ottawa, 1972). [24] This has largely been the creation of Memorial University's Institute for Social and Economic Research. Among many publications are C. Wadel, Marginal Adaptations and Modernization in Newfoundland (St. John's, 1969); O. Brox, Newfoundland Fishermen in the Age of Industry (St. John's, 1972); N. Farstad, Fisheries Development in Newfoundland (Oslo and Bergen, 1972); and D. Alexander, "The Political Economy of Fishing in Newfoundland," Journal of Canadian Studies (1976) 11(1):32-40. [25] See P. Neary, The Political Economy of Newfoundland (Toronto, 1973), and D. Alexander, "Development and Dependence in Newfoundland," Acadiensis (1974) 4(1):3 31; "Newfoundland's Traditional Economy and Development to 1934," Acadiensis (1976) 5(3):56-78; "The Decline of the Saltfish Trade and Newfoundland's Integration into the North American

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[26] [27] [28]

[29]

[30] [31] [32] [33]

[34]

D. Alexander Economy," in Canadian Historical Association, Historical Papers, 1976, 229-48; and The Decay of Trade (St. John's, 1977). G.K. Goundrey, "The Newfoundland Economy: A Modest Proposal," Canadian Forum (March, 1974) 53:18. S. Kuznets, Modern Economic Growth (New Haven, 1966), table 2:5 Calculations from M.C. Urquhart and K.A.H. Buckley, eds., Historical Statistics of Canada (Toronto, 1965), series A2-14; and Newfoundland, Historical Statistics of Newfoundland, table Al. For migration patterns in the Maritimes, see A.A. Brookes, "Out-Migration from the Maritime Provinces, 1860-1900: Some Preliminary Considerations," Acadiensis (1976) 5(l):26-55. Calculated from P.B. Kenen, "A Statistical Survey of Basic Trends," in American Economic History, S.E. Harris, ed. (New York, 1961), Table 2, 68. See A. Maddison, Economic Growth in the West (London and New York, 1964), table D-2, 213. All calculations from the 1891 and 1941 Census of Canada, and the 1935 and 1945 Census of Newfoundland and Labrador. For a discussion of the location quotient, see W. Isard, Methods of Regional Analysis (Cambridge, Mass. 1960), 123-4. The West has been excluded because its growth from the turn of the century distorts trends in the older settled regions, which must be the reference point for analysis of Atlantic development. A.G. Green, Regional Aspects of Canada's Economic Growth (Toronto 1971), app. B; Newfoundland, Report of the Royal Commission on the Economic State and Prospect of Newfoundland and Labrador (St. John's, 1967), table 3. GVP is the value of shipments, while GVA is this less the value of inputs.

[35] Where possible, all Newfoundland estimates were double-checked against other sources. [36] In the case of the service sector, the labour force analysis gives some support for these assumptions. [37] In the case of the Maritimes and Newfoundland, however, the broad similarities of industrial mix and the state of technology in most sectors should not lead to serious distortions. [38] Henceforth, the qualification "excluding construction" will not be made. [39] Calculated from, Canada, The Maritime Provinces in Their Relation to the National Economy of Canada (Ottawa, 1948), table 3, 44-5.

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[40] W.S. and E.S. Woytinsky, World Population and Resources (New York, 1953), table 209, 44-5. [41] The comparable Quebec/Ontario rate calculated from deflated values in Canada Year Book, 1914, table 9; 1924, 203-4; 1934-5, 254-5; and 1941, 152-3. [42] Cash farm sales in the Maritimes were substantially lower than in Quebec/Ontario, but this reflects relative development of markets and not the wellbeing of the population. [43] In 1926 the real capital/labour ratio was $3,618 in the Maritimes and $3,833 for Canada but the output/labour ratio was $2,337 in the Maritimes and $2,958 for Canada. Calculated from Maritime Provinces in Relation, Table 20, 68-9. [44] The Maritime capital/labour ratio in pulp and paper in the 1920s was about 20 percent lower, as was output per worker. In the 1930s, however, with the spread of newsprint mills the Maritime ratios converged with the Canadian. [45] Newfoundland, Journal of the House of Assembly, Customs Returns, 1873. [46] Ibid., 1912. [47] HMSO, Department of Overseas Trade, Economic Conditions in Newfoundland (London, 1931), 28; and Maritime Provinces in Relation, table 20, 68-9. [48] Newfoundland Industrial Development Board, Industrial Survey (St. John's, 1949), Vol 2, 34-5. [49] Calculated from Industrial Survey, vol. 2, 37; and Maritime Provinces in Relation, table 24, 74-5. [50] Economic Council, Living Together, 43. [51] An estimate derived from wages paid in 1938, as given in Industrial Survey, vol. 2, 324, and total earnings for 1935 as given in Tenth Census of Newfoundland and Labrador, 1935, vol. 2, pt. 1, sec. 11, 85. [52] M. Prince, Provincial Mineral Policies: Newfoundland, 1949-75 (Kingston, 1977), 4. [53] Woytinsky, World Population, table 322, 571.

[54] Calculated from Tenth Census of Newfoundland, vol. 2, 85. [55] This is discussed in Alexander, Decay of Trade, ch. 1. [56] Calculated from Woytinsky, World Population, 1003. [57] The lower level of market activity in Newfoundland biases the results against the island for all sectors. For the development of the manufacturing sector, see J. Joy, "The Growth and Development of Trades and

266

[58] [59] [60] [61] [62] [63] [64] [65] [66] [67]

[68]

D. Alexander Manufacturing in St. John's, 1870-1914" (MA thesis, Memorial University of Newfoundland, 1977). Woytinsky, World Population, table 423, 997. For both the Maritimes and Canada the actual rate might be somewhat higher because of a change in reporting which reduced the enumeration of output in 1910 relative to 1880. Industrial Survey, vol. 1, 90. Maddison, Economic Growth, 28. Maddison's GDP estimate for Canada is 3.8 percent, which is identical to our estimate for goods production growth. Ibid., table A-2. Maddison's estimate of total production growth in Canada for 1910-38 is 1.0 percent. Calculated from MacKay, Newfoundland, app. B. The gross value of production series which has been used in this essay shows a ratio of 63 percent. See D. Alexander, "Traditional Economy.' Between 1920 and 1937, Newfoundland's share of output in the North Atlantic fishery fell by twelve percentage points, and in the international markets the country steadily lost ground against its major competitors. Whatever the trading difficulties (and they were not uniquely faced by this country) they were compounded by a backward technology in primary fishing, poor product quality, and inefficient and fragmented marketing, See Alexander, Decay of Trade, ch. 2 and 3. D. Erank, "The Cape Breton Coal Industry and the Rise and Fall of the British Empire Steel Corporation," Acadiensis, 7(l):3-34 (1977).

The Evolution of Quebec Government Spending, 1867-1969 R. DUPRE There is a tradition in Canada of considering the province of Quebec, with its French-speaking and Catholic majority, as rather singular. One of the peculiarities most often stressed is the historical behaviour of its government. It is widely believed that Quebec did not have an interventionist government, contrary to the other Canadian provinces and indeed to most western countries, before the 1960s.1 This thesis seeks to determine whether this was the case by analysing Quebec government spending from Confederation to the end of the "Quiet Revolution" in the period 1867 to 1969. Spending is of course only one of the instruments of government. Regulation, public ownership, and more recently tax expenditures, are also important, but they cannot be quantified and their evolution over time cannot be readily observed. In what follows, the main findings are outlined under three headings corresponding to the three objectives of the thesis: the building of a consistent fiscal series, the formulation and estimation of a model to try to explain the evolution of expenditures, and the comparison with Ontario to verify Quebec's uniqueness.

A Century of Public Finances in Quebec The primary source of fiscal data, the Public Accounts,2 is kept primarily to ensure the "accountability" of public spending and does not generally provide convenient information. A few examples should suffice to show that the data cannot be taken at face value. The data are classified by ministry or department but this is not a useful breakdown since some government functions are carried on by several departments, some departments are spending on different functions, and the government structure is frequently modified. Secondly, as late as 1953, various revenues were netted out of expenditures, a procedure applied very often but not always, with the result that total expenditure and revenue are inconsistent over time. These totals are difficult to interpret, especially before the 1930s, since they include all kinds of outlays—capital costs, extraordinary spending, trust funds, debt repayments, and so forth—that are not clearly identified. Source: This is an extended version of the summary of R. Dupr6's doctoral thesis, "The Evolution of Quebec Government Expenditures, 1867-1969" (University of Toronto, 1987) in Recent Doctoral Research in Economic History, D-Sessions, Tenth International Economic History Congress Leuven, Leuven University Press, 1990:115-121. Reprinted by permission of the publisher.

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It is possible to overcome these problems using the wealth of detail in the Public Accounts to derive some consistent series. We have built annual series, global and disaggregated, of expenditure and revenue from 1867 to 1969. Both are broken down in large categories—ten for expenditures and four for revenues—and each category is further disaggregated: for instance, in education we have information on how much was spent on universities, technical schools, agricultural schools, primary education, libraries, and the like. In 1969 the size and pattern of Quebec government expenditures are quite different from what they were a century earlier. Expenditures that amounted to a little over $1 million in 1867 increased 3,000-fold to total more than $3 billion in 1969. Because prices and population increase by about 400 percent in the same period, real expenditures per capita increased one hundred fold. Their composition also radically changed: while law and order represented almost half and social spending less than a quarter of the budget in 1870, their respective proportions are 8 percent and 60 percent a century later. Let us briefly sketch how this happened. At the time of Confederation, the predominant view about the role of the state was that "the government governs best which governs least." Provincial governments of the new Dominion of Canada were even more limited because the central government assumed the most important functions of the time— defence, economic development, and interprovincial transportation—leaving to them local matters such as education, justice, and health, then considered minor responsibilities. This did not prevent the Quebec government from catching the railway fever and spending $26 million on aid to railways between 1873 and 1900, with dramatic consequences for provincial finances. It was only in 1912, with the Good Roads Act, that the government was again involved in a large project. On the eve of the World War I, the Quebec government was still very much a "nineteenth century government" giving priority to transportation and law and order. The year 1921 marks the beginning in Quebec of state intervention in social welfare. Under the Public Charities Act, the province, municipalities, and private charities shared the costs of institutional care for the needy. During the Great Depression of the 1930s, the severe unemployment problem required exceptional measures. The initiative came from the federal government's Unemployment Aid Act (1930), a joint federal-provincial program of direct relief and public works subsidies. In addition to these emergency measures, in 1936 the Quebec government finally adopted the federal-provincial old age pension program and in 1939 a pension scheme for needy mothers and the blind. Welfare expenditures, which had always been less than 15 percent of the budget, represented more than half the budget during the 1930s. During World War II, as in World War I, public expenditure and taxation were concentrated at the federal level. Quebec government spending did not

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grow between 1940 and 1944 but important legislative changes were introduced in various spheres: the extension of the vote to women in 1940, compulsory education in 1943, and nationalization of Montreal Light, Heat, and Power and Beauharnois Power to form Hydro-Quebec in 1944. In the same year, M. Duplessis, who was to retain office until his death in 1959, and his Union Nationale ended the fifty-year reign (1896-1944) of the Liberal Party which had been briefly interrupted by Duplessis' first mandate in 1936-9. The conventional wisdom in Canadian historiography is that Duplessis was extremely conservative, both ideologically and financially.3 Our data support the view of a Duplessis government living within its means, since expenditures and revenues were closely linked and there were more years with a surplus than with a deficit; however, they do not support the contention that the structure of spending remained traditional and that the welfare state did not gain ground in Quebec before the 1960s. Under Duplessis, spending on education and health and welfare account for between 40 percent and 50 percent of total spending, while outlays on law and order are less than 10 percent. The final decade of our study was the most notorious of all in Quebec with respect to government intervention. The term "Quiet Revolution" was coined by reporters to describe the transformation in the role of the state. The most important actions of J. Lesage's Liberal government (1960-5) were concentrated in three fields: natural resources, with nationalization of electricity in 1962; health, with hospitalization insurance; and education, with the creation of the Ministry of Education and free universal secondary education. There was undoubtedly an impressive growth in government expenditures in this decade, by 400 percent in nominal terms and 260 percent in real terms. The trend towards social spending depicted in the Duplessis period was not only maintained but accentuated as education and health and welfare came to represent two-thirds of the budget by the end of the decade. This was not, however, a phenomenon unique to Quebec. For instance, Ontario had very similar rates of growth. Indeed, this was the case in the rest of Canada and in most countries in the Organization for Economic Cooperation and Development. What was unique to Quebec were the institutional changes resulting from the "crowding out" of the Catholic Church and the federal government by the provincial government. In the fields of education and health and welfare, the Quebec government replaced financial assistance by control of most of the institutions until then in the hands of the Church. Quebec also became more assertive—opting out of several federal-provincial programs in favour of its own public pension and medicare plans.

A Model of Government Behaviour Utility maximization under constraint is widely used by economists to characterize government decision making. There is, however, a particular difficulty

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in determining what exactly it is that governments maximize: the population's utility or their own? Following the "public choice school," the government is assumed here to maximize its own utility. In its utility function, there are three arguments: expenditures, taxes, and borrowing. Some expenditures, such as roadbuilding, can be said to increase the government's utility because they may increase its probability of reelection, while other outlays, such as education or justice, with no electoral virtue in the period we are concerned with, may give the government satisfaction for more subtle motives: that is, "personal power, image in history, pursuit of lofty personal ideals."4 Both taxes and borrowing, as alternative means of financing expenditures, provide disutility. Prom the maximization of this utility function under a budgetary constraint, we derived five equations for expenditures in education, health and welfare, agriculture, transportation, and all others. Each category was assumed to be affected by government revenues, derived from the budgetary constraint, and by provincial income, a variable reflecting demand as well as supply forces. Political preoccupations were introduced in the equations of agriculture and transportation, the two categories of spending that are historically electoralist. Additional variables specific to each category of expenditures were also included. For instance, the rate of urbanization and demographic variables, such as the proportion in the population of children and senior citizens were considered as demand factors for social spending on education and health and welfare. On the supply side of these expenditures, the substitution between the public and private sectors was especially interesting because of the predominance of the Catholic Church in the social field for most of Quebec history. Unfortunately, no data on the Church spending were available but we used as a proxy the proportion of religious in the total number of teachers in the education equation. The estimation results give, at best, limited support to Wagner's Law, one of the classic hypotheses of the public finance literature. Our income coefficients are positive and statistically significant in only two of the five categories of expenditures: education and miscellaneous (which includes law and order). The explanation varies with the category of spending. For welfare outlays, falling rather than rising provincial income may lead to an increase in the demand for government commitment, as it did during the Great Depression. In the case of transportation, it is possible that, after the completion of the network, railway and later road outlays became less important regardless of provincial income. However, our attempt to take into account some institutional and political factors produces encouraging results as the Catholic Church proxy and the electoral variables are generally statistically significant.

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A Comparison with Ontario To challenge the conventional wisdom of a unique noninterventionist state in Quebec until the 1960s, the Quebec government's spending pattern must be compared with that of other provinces. Ontario is the most obvious candidate for comparison. The two provinces are different in many respects: the ethnic composition of their population, industrial structure, and macroeconomic and unemployment performance. But they share a common geography and, to a large extent, history, and a similar timing and pattern of industrialization and urbanization. There are many comparisons of Quebec-Ontario agriculture, industrialization, business cycles and government intervention. Moreover, some comparable data are available for almost the whole period as I.M. Drummond has compiled a fiscal series for Ontario on the same basis as ours for Quebec in the period 1867-1939, while Statistics Canada's provincial public finance data begin in 1950.5 The comparison shows some difference in spending patterns but not a systematically less interventionist government in Quebec as conventional wisdom would have it. Quebec outspent Ontario almost until World War I, mostly because of its heavier involvement in railway building in the last quarter of the nineteenth century. After the war, this pattern is reversed until the beginning of the 1960s when Quebec's per capita public spending becomes once again larger than Ontario's. By the most conventional measure of government activity—provincial government expenditures as a percent of gross provincial product—Quebec leads Ontario throughout the whole period with the exception of 1920-35. When one discusses the growth of government intervention in this century, it is often with the rise of the welfare state in mind. Provincial government expenditures on education, and health and welfare show a strong upward trend in both provinces during the century since Confederation. While the growth rates are similar, the Quebec's expenditure levels are systematically below Ontario's. This is not surprising given that the Catholic Church in Quebec assumed functions that elsewhere were largely undertaken by the state. What is surprising is that the gap narrows considerably and even disappears in the case of health and welfare at least from 1950 (and perhaps before, since Ontario data for the 1940s have not been compiled), casting some doubt on the uniqueness and revolutionary character of the 1960s in Quebec (see Table 1).

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Table 1: Share of Government Expenditures by Function, Quebec and Ontario Selected Years (percent).

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1969

Education Que. Ont. 17.7 20.1 6.4 25.5 10.7 21.3 11.4 25.4 16.7 29.6 20.1 19.6 9.4 14.5 6.3 9.2 17.2 17.9 22.7 1.1 28.7 32.9

Health and Welfare Que. Ont. 10.4 26.4 4.4 20.4 5.7 27.6 9.2 26.1 9.3 16.6 5.7 11.5 15.6 16.6 29.5 32.3 32.8 29.4 31.6 33.4 0.5 3.2

Transportation Que. Ont. 14.3 3.2 54.4 11.6 21.1 9.9 5.5 7.4 6.3 7.0 31.0 28.7 31.2 29.0 26.2 24.0 20.5 25.5 20.6 23.2 9.6 11.2

Social Order* Que. Ont. 43.9 22.5 16.6 26.2 30.2 27.8 29.0 25.6 37.2 17.1 16.8 8.4 17.2 8.1 9.9 5.4 8.2 8.9 8.3 7.3 7.6 7.1

Natural Resources Que. Ont. 9.6 22.6 3.7 14.7 7.3 11.9 8.3 12.0 10.2 17.3 13.8 12.2 15.6 9.1 13.5 4.8 13.3 6.2 11.0 3.6 5.7 3.1

Sources: For Quebec, Dupr£ "The Evolution of Quebec Government Expenditures, 18671969,"(1987), 269-272. For Ontario, I. Drummond, unpublished data for Ontario 18701940 and Statistics Canada cat. no. 68-207, Financial Statistics of Provincial Governments 1950-1969 (Ottawa, annual). * "Social order" includes outlays on legislation, general administration, justice and public works. Note: There is also a residual category not shown here which consists of miscellaneous expenditures and of public debt servicing. This latter represented in some years a quite large portion of total spending: between 20 percent and 32 percent in Quebec in 1890-1900 and between 15 and 20 percent in Ontario in 1920-1940.

Appendix 1: A Statistical Test of the differences in Quebec-Ontario Government Spending The author used the Chow test of the equality of regression coefficients to test whether the behaviour of the Quebec and Ontario governments differed in a statistically significant way. The test was performed on the five categories of expenditure equations which were developed in previous research to explain Quebec government spending. Because there is a problem of structural change in the Quebec expenditure estimations during the hundred year period under study and since there is a gap in the Ontario data for the 1940s, it seemed more appropriate to test two subperiods, 1868-1940 and 1950-69 separately. The F-ratio of Table A-l

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indicates that the responses of the two provincial governments are significantly different in almost all cases (eight out of ten) for the two periods. These results mean that the two governments tended to react differently to socioeconomic variables such as income per capita, some government revenues, or urbanizar tion, and to political factors such as their popularity level or the time left before an election. Table A-l: Chow's Test for Structural Difference between Quebec and Ontario (F-ratios). (a) 1868-1940 Expenditure Equation1 EDUC HW TRAN AGR OTH

Estimated F 1.33 5.56 11.36 23.47 33.39

Critical F* (1%) 3.02 2.80 2.80 3.02 3.02

F* (5%) 2.21 2.10 2.10 2.21 2.21

Degrees of freedom 5/130 6/128 6/128 5/130 5/130

(b) 1950-1969 EDUC HW TRAN AGR OTH

5.09 18.40 1.38 4.72 9.35

3.70 3.53 3.53 3.70 3.70

2.53 2.45 2.45 2.53 2.53

5/30 6/28 6/28 5/30 5/30

Description of the equations and variables (1) EDUCt = ao + ai RYNt + a2 REVt + a3 URBt 4- a4 CHILDt + UH (2) HWt = bo + bi RYNt + b2 FED* + b3 REVMFEDt + b4 URBt + b5 OLDt + u 2 < (3) TRANt = c0 + ci RYNt + c2 REVt -f c3 AUTOt 4- c4 POPLAGt 4- c5 TBE -f u3l (4) AGRt = do 4- di RYNt + d 2 REVt + d3 AGN -f d4 POPLAGt 4- d5 TBE 4- u 4 t (5) OTHt = e0 -f ei RYNt 4- e2 REVt 4- e3 POPLAGt 4- e4 TBE + u5t where EDUC, HW, TRAN, AGR, and OTH are real Quebec or Ontario government expenditures per capita respectively on education, health and welfare, transportation, agriculture and colonization, and miscellaneous. The explanatory variables are defined as:

274 AGN

AUTO CHILD FED OLD POPLAG

REV REVMFED RYN TBE URB

t Ut

R. Dupre Percentage of the province labour force occupied in the agricultural sector. It is a linear interpolation of census year data on the proportion of male workers in agricultural occupations during 1891-1969. A constant proportion equal to the 1891 percentage is assumed for the period prior to 1891. Number of registered automobiles per capita from 1907 as reported for both provinces in the annual Quebec Statistical Yearbook. Proportion of the population in the "5-14" age group: a linear interpolation of the census year data. Federal transfer payments in health and welfare in real terms per capita. Proportion of the population in the "65 and over" age group: a linear interpolation of the census year data. Popularity index in terms of percentage of seats to the party in power, lagged one period. The index is built from the general election results interpolated linearly for the years between elections, except for the elections which were particularly affected by some events such as L. Kiel's execution in 1885, the Baie des Chaleurs scandal of 1891, the conscription crises in Quebec during the two wars, and the "Minnie" scandal of 1902 in Ontario. All Quebec or Ontario government revenues assumed to be exogenous: federal grants and miscellaneous, in real terms per capita. REV minus FED. Estimated provincial income in real terms per capita. Index number decreasing to the election year. Rate of urbanization; the pre-1951 definition "percentage of the population living in cities, towns and villages regardless of size" had to be used as it is the only one available for the period 18711941. 1871-1969 Error term.

As there was a problem of autocorrelation, the equations were estimated using the Cochrane-Orcutt iterative method.

Notes [I] See for instance, W. Marr and D.G. Paterson, Canada: An Economic History (Toronto, 1980). [2] Quebec, Public Accounts, annual (1868-1969). [3] K. McRoberts and D. Postgate, DSveloppement et modernisation du Quebec (Montreal, 1983) 79-83, 96-97.

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[4] A. Breton, The Economic Theory of Representative Government (Chicago, 1974), 124. [5] I.M. Drummond, "The Ontario 'Exchequer,' 1867-1940" (unpublished paper, University of Toronto, 1980); and Statistics Canada, Financial Statistics of Provincial Governments, cat. no. 68-207 annual (Ottawa, 1950-69).