Sources and References

Primary textbook — No single required textbook; all readings available through UWaterloo Library and course reserves.

Core readings — Backhouse, Roger, and others; McInnis, Marvin. “The Economy of Canada in the Nineteenth Century,” in Cambridge Economic History of the United States, Vol. 1; Green, Alan G. “Twentieth Century Canadian Economic History,” in Cambridge Economic History of the United States, Vol. 2; Norrie, Kenneth, Douglas Owram, and J.C. Herbert Emery. A History of the Canadian Economy, 4th ed. Nelson, 2008 (standard reference text).

Seminal articles — Innis, Harold. Staples, Markets and Cultural Change (selected chapters including “Introduction to the Economic History of the Maritimes”); McCalla, Douglas. “Economy and Empire: Britain and Canadian Development, 1783–1971”; Carlos, Ann M. and Frank D. Lewis. “Creative Financing of an Unprofitable Enterprise: The GTR,” Explorations in Economic History 32; Bordo, Michael D., Angela Redish, and Hugh Rockoff. “A Comparison of the Stability and Efficiency of the Canadian and American Banking Systems, 1870–1925,” Financial History Review 3(1) 1996; Bordo, Michael D. and Angela Redish. “Why Did the Bank of Canada Emerge in 1935?”, Journal of Economic History 47(2) 1987; Eichengreen, Barry. “Understanding the Great Depression,” Canadian Journal of Economics 37(1) 2004; Trefler, Daniel. “The Long and Short of the Canada-US Free Trade Agreement,” American Economic Review 94(4) 2004.

Methodology readings — Solow, Robert M. “Economic History and Economics,” American Economic Review 75(2) 1985; Lamoreaux, Naomi. “Economic History and the Cliometric Revolution,” in Imagined Histories, eds. Molho and Wood, Princeton UP 1998; McCloskey, Deirdre. “It was ideas which changed in Northwestern Europe, 1600–1848,” Journal of Evolutionary Economics 25 (2015).

Historical documents (primary sources) — Gourlay, Robert. Statistical Account of Upper Canada (1822); Royal Commission into Immigration of Italian Labourers (1905); Hawthorne, Harry B. A Survey of Contemporary Indians of Canada (1966).

Online resources — Library and Archives Canada (collectionscanada.gc.ca); Bank of Canada historical data and working papers; Statistics Canada historical series; Dictionary of Canadian Biography; Canada’s History magazine digital archives.

Chapter 1: Approaches to Economic History

1.1 What is Economic History?

Economic history occupies a border territory between economics and history. From economics it borrows analytical frameworks — supply and demand, incentive structures, game theory — to interpret past behavior. From history it borrows the insistence on context, contingency, and the uniqueness of particular events and institutions. The productive tension between these two disciplines is the source of the field’s vitality.

Robert Solow’s pithy distinction (1985) is illuminating: economics, he argued, is about the logic of choice under scarcity; economic history is about the content of choice in particular circumstances. General economic models are useful precisely because they abstract from particulars; economic history is useful precisely because it studies particulars. Both activities are essential; neither can replace the other.

Cliometrics — the application of quantitative methods and explicit economic theory to historical questions — transformed economic history from the 1960s onward, associated particularly with Robert Fogel and Douglass North. The cliometric revolution introduced counterfactual reasoning (“what would have happened if the railroads had not been built?”), national income accounting for historical periods, and econometric methods for establishing causal relationships in historical data. Naomi Lamoreaux has argued that cliometrics, while valuable, risks losing the narrative and contextual richness that makes economic history more than applied econometrics.

1.2 Methodological Approaches

Three broad methodological approaches characterize modern economic history:

Quantitative-cliometric: Statistical analysis of historical data, often with explicit economic models and attention to identification. The strength is precision and causal inference; the weakness is that historical data are noisy, incomplete, and not designed for econometric analysis.

Institutional-narrative: Following Douglass North, emphasizes how institutions — property rights, legal rules, political structures — shape economic incentives and outcomes over time. Path-dependence means that historical accidents can have long-run consequences; institutional change is typically slow and contested.

Social-cultural: Following Deirdre McCloskey’s recent work, emphasizes the role of ideas, rhetoric, and culture in driving economic change. McCloskey argues that the Industrial Revolution and the “Great Enrichment” of the past two centuries cannot be explained by material factors (capital accumulation, resource endowment) alone — changes in how Europeans talked about and evaluated commercial activity were essential preconditions.

1.3 Evidence and Sources

Historical economic analysis draws on diverse source types: probate inventories (for wealth distribution), census records (for population and occupation), merchant account books (for prices and commercial practices), government documents and legislation, legal records, newspapers, and physical artifacts. Primary documents — such as Gourlay’s Statistical Account of Upper Canada (1822) or the Royal Commission into Immigration of Italian Labourers (1905) — are invaluable not only for the data they contain but for the assumptions and purposes embedded in their construction.

Pierre Gervais’s work on eighteenth-century merchant networks reminds us that commercial archives can reveal much about the informal institutions — trust, reputation, credit relationships — that sustained long-distance trade before formal legal enforcement mechanisms were adequate.

Chapter 2: The Atlantic World and the Formation of Colonial Economies

2.1 State Formation and the Atlantic System

The settlement of North America by Europeans was not a natural or inevitable process; it was the product of a specific configuration of Atlantic power, commercial capitalism, and state formation in the sixteenth and seventeenth centuries. Patrick O’Brien’s comparative analysis situates European state formation in a global context: the fiscal-military states that emerged in England, France, the Netherlands, and Spain were simultaneously engines of domestic economic development and instruments of Atlantic expansion.

Max Weber’s analysis of the origins of modern capitalism is relevant here. Weber identified the emergence of rational capitalism — characterized by double-entry bookkeeping, formal legal structures, free labor, and systematically calculated profit-seeking — as a specifically Western European phenomenon. The Protestant ethic, in Weber’s famous argument, provided the cultural legitimation for systematic accumulation. Whether or not one accepts the Weber thesis in full, the institutional distinctiveness of English commercial capitalism shaped the character of English colonialism in North America and the Caribbean in ways that differed sharply from Spanish colonialism in Latin America.

Findlay and O’Rourke’s Power and Plenty (2007) situates the early Atlantic economy in long-run Eurasian trade history. The transformation of global trade after 1500 — the integration of the Americas into an Atlantic system, the expansion of European commercial networks into the Indian Ocean — generated both unprecedented economic growth and enormous violence, including the transatlantic slave trade.

2.2 The Fur Trade and the Staples Economy

The fur trade was the organizing economic institution of the Canadian north and northwest from the early seventeenth century until the mid-nineteenth century. It was not simply a trading relationship between Europeans and Indigenous peoples; it was the mechanism through which the staples economy took shape.

Harold Innis (1894–1952), the most original Canadian economic historian, developed the staples theory of Canadian development. His foundational works — The Fur Trade in Canada (1930) and The Cod Fisheries (1940) — argued that Canadian economic history can only be understood through the lens of the country’s successive staple export commodities: fish, fur, timber, wheat, and eventually minerals and energy. Each staple shaped not only economic structures but also the spatial organization of the country, its political institutions, and its cultural forms.

The staples thesis has several key elements:

• Export-led growth: Canadian development was driven by demand from metropolitan centres (first Britain, then the United States) rather than by the growth of a domestic market. Economic activity organized itself around the collection, processing, and export of primary commodities.
• Linkages: Staple exports created backward linkages (demand for inputs — transportation, barrels, salt, flour) and forward linkages (processing of the raw commodity). The character of the staple determined the density and type of these linkages. Fur required relatively few linkages — it was a high-value, low-bulk commodity requiring only Indigenous labor and birchbark canoes. Wheat required massive investment in transportation infrastructure, flour mills, and farm equipment.
• Staple trap: Staple-dependent economies face the risk of becoming locked into a pattern of resource dependence, with weak manufacturing and limited technological development — perpetually exporting raw materials and importing manufactured goods.

2.3 Land Systems and Colonial Development

The land systems imposed in colonial Canada reflected competing visions of what kind of society was to be built. In New France, the seigneurial system — an adaptation of French feudal land tenure — divided the St. Lawrence valley into long narrow strips perpendicular to the river, with habitants (tenant farmers) paying dues to seigneurs (landlords). The system discouraged large-scale commercial agriculture and concentrated population along the river for defensive and commercial purposes.

In Upper Canada (present-day Ontario), land grants and the clergy and crown reserves (one-seventh each of township land set aside for the Protestant clergy and the Crown respectively) became a major political grievance in the early nineteenth century. Robert Gourlay’s Statistical Account of Upper Canada (1822) — one of the earliest social surveys of the province — was motivated in large part by Gourlay’s conviction that the reserve system was preventing agricultural development by creating a patchwork of idle, unimproved land that blocked communication and discouraged settlement.

Harold Innis’s “Introduction to the Economic History of the Maritimes” emphasizes that the Maritimes’ development was shaped by their position at the intersection of the North Atlantic fishery, the West Indian trade, and the timber economy. The region’s relative economic stagnation after Confederation reflects in part the loss of reciprocal trade arrangements with the United States and the diversion of economic activity toward the St. Lawrence system — a classic case of how political boundaries can redraw economic geography.

Chapter 3: Infrastructure, Banking, and the Nineteenth-Century Economy

3.1 Canals, Railways, and the Transportation Revolution

The transformation of the Canadian interior from a collection of isolated settlements into an integrated economy required massive investment in transportation infrastructure. The canal era (1820s–1840s) and the railway era (1850s onward) were the two great phases of this transformation.

The Welland Canal (opened 1829, expanded 1845 and 1887) connected Lake Erie to Lake Ontario, bypassing Niagara Falls and allowing direct water transport between the upper Great Lakes and the St. Lawrence. Hugh Aitken’s study of the Family Compact and the Welland Canal Company (1952) illustrates how infrastructure investment in early Canada was entangled with political patronage: the same small elite that dominated the appointed legislative councils of Upper Canada were the directors and major shareholders of the canal company.

The role of American capital in Canadian infrastructure development is illustrated by the Grand Trunk Railway (GTR). Ann Carlos and Frank Lewis’s study of the GTR demonstrates how a financially unprofitable enterprise was sustained through creative financing — specifically, through the bondholder structure that allowed the railway to continue operating despite persistent operating losses. The GTR was “unprofitable” in narrow financial terms but generated enormous external benefits for the settlement and development of southern Ontario.

Marchildon’s work on Canadian industrial financing in the City of London shows that British capital markets were indispensable for Canadian infrastructure development throughout the nineteenth and early twentieth centuries. Canada’s ability to borrow in London at rates close to those paid by the British government itself — a reflection of confidence in Canadian institutional stability and resource wealth — was a major advantage in financing railway construction and settlement.

3.2 Canadian Banking: Structure and Stability

One of the most analytically interesting contrasts in North American economic history is between the Canadian and American banking systems. In the United States, the free banking era (1837–1863) and the subsequent unit banking system (one-branch banks, restricted to a single state or even a single location) produced a fragmented, unstable banking system prone to periodic panics and runs. In Canada, the evolution of a branch banking system dominated by a small number of large nationally chartered banks produced a markedly more stable financial system.

Bordo, Rockoff, and Redish (1996) quantify this contrast: in the period 1870–1925, the US experienced 13 banking panics, while Canada experienced none (though Canadian banks were not immune to economic fluctuations). The Canadian system’s stability reflected several structural features:

• Large national banks with diversified portfolios across regions, making them less vulnerable to local economic shocks
• Branch networks that could shift liquidity to where it was needed
• The absence of deposit insurance requirements that might encourage risk-taking
• A regulatory framework that favored bank consolidation over competition

The flip side of Canadian banking stability was reduced competition and higher bank profits. Canadian chartered banks operated as a comfortable oligopoly, with relatively high loan rates and conservative lending practices that may have constrained small-business access to credit.

Joe Martin’s financial history (with Chris Kobrak) traces the evolution of the Canadian financial system through the “maturing period” 1869–1914, during which the infrastructure of modern Canadian capitalism — the stock exchanges, investment banks, and trust companies of Bay Street — took shape alongside the dominant chartered banks.

Chapter 4: Confederation and the National Policy

4.1 Confederation, 1867

The British North America Act of 1867, creating the Dominion of Canada by uniting the Province of Canada (Ontario and Quebec), New Brunswick, and Nova Scotia, was driven by a mixture of imperial strategy, colonial politics, and economic calculation. The British government was eager to reduce the cost of defending its North American colonies; Canadian politicians, particularly John A. Macdonald and George-Étienne Cartier, saw Confederation as the means to achieve economic goals that neither province could achieve alone.

The economic logic of Confederation included: the creation of a large unified domestic market without internal tariffs; the pooling of resources for infrastructure development, particularly the planned transcontinental railway; and a common external tariff policy. From an economic standpoint, Confederation was a customs union — eliminating internal barriers while maintaining a common external tariff.

The economic consequences for the different regions were uneven. Ontario had the largest industrial base and stood to gain most from an integrated domestic market. Quebec’s manufacturers also benefited from tariff protection. The Maritimes, with their strong orientation toward the Atlantic trade, were more ambivalent: they lost the reciprocal free trade with the United States that had sustained their fish and timber exports, and the tariff walls of Confederation directed trade northward and westward rather than seaward.

4.2 The National Policy, 1878–1896

John A. Macdonald’s National Policy, introduced after the Conservatives’ return to power in 1878, represented a coherent program of economic nationalism with three interlocking elements:

High tariffs on manufactured goods: The tariff of 1879 raised duties on manufactured imports to rates ranging from 25% to 35% — high enough to protect Canadian manufacturers from American competition and encourage foreign (particularly American) firms to establish Canadian branch plants to serve the protected market. The National Policy tariff shaped the structure of Canadian manufacturing for a century.

Construction of the Canadian Pacific Railway (CPR): The transcontinental railway, completed in 1885, was the National Policy’s most spectacular achievement and its most expensive. The CPR was built with massive federal subsidies — $25 million in cash, 25 million acres of land in the prairies, and a 20-year monopoly on trans-prairie traffic. The railway opened the West to settlement, connected the Pacific coast to eastern markets, and fulfilled the railway clause of British Columbia’s accession to Confederation.

Settlement of the Western Interior: The completion of the CPR was the necessary condition for prairie settlement, but it required a stream of immigrants to fill the land. Under Macdonald and more aggressively under Clifford Sifton (Interior Minister under Laurier), Canada recruited settlers from eastern Europe — Ukrainians, Poles, Mennonites — as well as Britain and the United States. Sifton famously described his ideal settler as “a stalwart peasant in a sheep-skin coat, born on the soil, whose forebear have been farmers for ten generations.”

4.3 The Laurier Boom, 1896–1913

The period from 1896 to the outbreak of World War I in 1914 was the golden age of prairie settlement and Canada’s most rapid period of economic growth. Three factors converged: the exhaustion of free land in the American Great Plains driving settlers northward to the Canadian prairies; rising world wheat prices (reflecting the general commodity price inflation of the Edwardian era); and improvements in wheat varieties (particularly the development of Marquis wheat, better suited to short prairie growing seasons).

Prairie wheat production expanded explosively: from about 50 million bushels in 1900 to over 200 million bushels by 1913. Immigration was massive: over 400,000 immigrants arrived in 1913 alone, and Canada’s population grew from 5.4 million in 1901 to 7.9 million in 1911. Urbanization accelerated; Winnipeg briefly challenged Montreal as Canada’s second city.

Marvin McInnis’s careful national income estimates for nineteenth-century Canada show that per capita income growth was concentrated in this period and in Ontario; Quebec’s industrialization was more labor-intensive and slower-growing; the Maritimes stagnated relative to the national average.

The Royal Commission into Immigration of Italian Labourers (1905) documents the underside of the Laurier boom: the recruitment of Southern European workers, primarily for railway construction and resource extraction, through a contract labor system that left them vulnerable to exploitation by padrones (labor brokers) and the companies that hired them. Italian immigrants were concentrated in the most dangerous, low-paid occupations — building the railways whose completion had seemed to promise national prosperity.

Chapter 5: Gender, Race, and the Limits of the National Economy

5.1 The Sexual Division of Labour in Industrial Canada

The dominant narratives of Canadian economic history have tended to focus on staple exports, railway construction, and aggregate national income — categories that systematically marginalize women’s economic contributions. Joy Parr’s work on “Disaggregating the Sexual Division of Labour” (1988) argues that gender was a constitutive feature of industrial work organization, not an incidental characteristic.

Parr’s comparative study of Paris, Ontario (a textile town) and Hanover, Ontario (a furniture town) demonstrates that the same period of industrialization produced radically different gender compositions of the labor force in adjacent communities, shaped by the specific labor requirements of their dominant industries. Textile production drew on female labor; furniture-making drew on male craft skills. The “natural” sexual division of labor was locally constructed and reproduced through hiring practices, wage structures, and community norms — not biologically given.

This analysis has broader implications for understanding aggregate economic data: wage statistics, labor force participation rates, and national income accounts that exclude unpaid household production and caregiving systematically undercount women’s economic contributions and distort the picture of economic development.

5.2 Indigenous Economies and Colonial Dispossession

Pre-contact Indigenous societies maintained diverse and sophisticated economies adapted to their ecological and social environments. The Pacific Coast nations practiced extensive trade, developed complex systems of property rights in fishing grounds and resource territories, and redistributed wealth through ceremonial exchange (potlatch). The Plains nations had large-scale buffalo hunting economies that sustained complex political and military structures. The Eastern woodland nations practiced intensive agriculture, hunting, and trade.

European colonization did not simply overlay a superior economic system on primitive subsistence economies. Cole Harris’s analysis of colonial dispossession (“How did colonialism dispossess?”, 2004) identifies the mechanisms through which Indigenous peoples were displaced from their lands: the reserve system (which concentrated populations on small, often agriculturally marginal lands), the numbered treaties (which transferred Indigenous territorial rights in exchange for reserves, annuities, and promises of agricultural instruction), and the suppression of traditional economic practices (the outlawing of the potlatch, restrictions on commercial fishing, the banning of hunting on ceded lands).

Shiri Pasternak’s counter-argument (“How Did Colonialism Fail to Dispossess?”, 2017) documents how the Algonquins of Barriere Lake have maintained a form of grounded authority — practical control over their territory through customary land management regimes — despite the formal apparatus of colonial land law. The picture of total colonial dispossession is more complicated on the ground than in the legal record.

The Hawthorne Survey (A Survey of Contemporary Indians of Canada, 1966) represents a turning point in Canadian government policy toward Indigenous peoples. Commissioned by the Department of Indian Affairs, the survey documented the severe poverty, educational disadvantage, and political powerlessness of reserve communities and called for a “citizens plus” approach — Indigenous peoples should have all the rights of Canadian citizens plus additional rights flowing from their prior occupancy. The “plus” element was explicitly rejected in Trudeau’s 1969 White Paper, which proposed to abolish the Indian Act and reserves — triggering the organized Indigenous political resistance of the 1970s.

John Lutz’s work on the “Aboriginal labouring class of British Columbia” after the fur trade shows that Indigenous peoples remained significant participants in the wage-labor economy of British Columbia through the late nineteenth and early twentieth centuries — in the canneries, hop fields, and coastal fisheries — until systematically displaced by changes in technology and immigration law.

5.3 Race and the Political Economy of Immigration

Patricia Roy’s history of anti-Chinese racism in British Columbia documents how race was deployed to manage labour market competition and political power. Chinese workers had been recruited to build the CPR’s western section — work so dangerous and poorly compensated that few white workers would accept it. After the railway was completed, the political pressure to exclude Chinese immigration intensified: British Columbia employers who wanted cheap labor and white workers who feared competition both had incentives to restrict Chinese immigration, though for opposite reasons.

The Chinese head tax (imposed 1885, raised to $100 in 1900 and $500 in 1903) was designed to deter Chinese immigration by making it economically prohibitive. The $500 head tax was equivalent to roughly two years’ wages for a Chinese laborer. It effectively restricted Chinese immigration without formally excluding it — a legal device that maintained Canada’s self-image as a country governed by law rather than racial exclusion.

Chapter 6: The Twentieth Century — Banking, Business Cycles, and the Depression

6.1 The Canadian Banking System and Financial Stability, 1870–1925

The contrast between Canadian and American financial history intensified in the early twentieth century. The United States experienced the Panic of 1907 — a classic bank run that required J.P. Morgan’s personal intervention to halt — and subsequently created the Federal Reserve System in 1913. Canada, with its branch-banking system, avoided the 1907 panic and had no pressing need for a central bank.

R.G. Hawtrey’s analysis of foreign exchange mechanisms provides the theoretical framework for understanding how the gold standard shaped Canadian monetary conditions in this period. Under the gold standard, Canadian money supply was tied to gold reserves; a trade deficit would lead to gold outflows, contracting the money supply and deflating prices until the trade balance was restored. Canada’s gold standard experience was complicated by the country’s role as a major capital importer — British capital inflows partially sterilized the deflationary pressures that would otherwise have come from trade deficits.

The comparative stability of the Canadian banking system in the pre-Depression period led many economists to attribute Canada’s relative immunity to banking crises to the oligopolistic structure of its banking system. But Bordo et al.’s careful comparison suggests that the decisive factor was the diversification achievable through nationwide branch networks, not oligopoly per se.

6.2 The Great Depression in Canada

Canada was among the countries hardest hit by the Great Depression, and its experience illustrates both the international dimensions of the Depression and its distinctively Canadian features.

Barry Eichengreen’s analysis of the Depression’s causes (“Understanding the Great Depression,” CJE 2004) emphasizes the role of the gold standard as the international transmission mechanism. The gold standard created a deflationary ratchet: countries that tried to maintain gold parity faced deflation and depression, while those that devalued earlier — like Britain, which left gold in September 1931 — recovered sooner. Canada’s decision to leave gold in 1929–31 and the subsequent depreciation of the Canadian dollar against the US dollar (which maintained gold parity until 1933) partially insulated Canada, but the collapse of commodity prices — particularly wheat — was devastating regardless of the exchange rate regime.

Canadian wheat prices fell by more than 60% between 1928 and 1932. Prairie farm incomes collapsed; gross farm income in Saskatchewan fell from $365 million in 1928 to $35 million in 1932 — a 90% decline. The combination of falling prices and the worst drought in prairie history (the “Dirty Thirties,” with the topsoil-stripping dust storms of 1933–1937) created a humanitarian catastrophe. Saskatchewan’s population fell — the only decade in Canadian history in which a province’s population declined.

Bennett’s New Deal: R.B. Bennett, Conservative Prime Minister 1930–1935, initially responded to the Depression with tariff increases (the 1930 tariff, including the Empire Trade preference) and public works employment. By 1935, facing electoral defeat, Bennett announced a Canadian version of Roosevelt’s New Deal — unemployment insurance, agricultural support, and marketing boards. The reforms were ruled unconstitutional by the Judicial Committee of the Privy Council (still Canada’s highest court) on the grounds that they invaded provincial jurisdiction — illustrating how Canada’s federal structure constrained the national government’s economic policy room.

6.3 The Creation of the Bank of Canada, 1935

Bordo and Redish’s study of the Bank of Canada’s founding (1987) addresses a puzzle: why did Canada create a central bank in 1935, when its banking system had been so stable without one? Their answer is primarily political rather than functional: the Depression had discredited the chartered banks in public opinion, creating pressure for public oversight of monetary policy; the new government programs (unemployment insurance, agricultural support) required a lender of last resort; and the international trend toward central banking made Canada’s position as one of the last major economies without a central bank increasingly anomalous.

The Bank of Canada’s early years were cautious. Its first governors emphasized its independence from the commercial banks but also from the government — an independence that proved contested during the Coyne Affair of the early 1960s, when Governor James Coyne’s restrictive monetary policy conflicted with the Diefenbaker government’s desire for expansion.

Chapter 7: War, Postwar Prosperity, and the Welfare State

7.1 World War II and Economic Mobilization

Canada’s economic mobilization for World War II was the most rapid and effective in the country’s history. The federal government assumed direct control over prices, wages, investment, and the allocation of scarce materials through the Wartime Prices and Trade Board (established 1939, greatly expanded after 1941) and the Department of Munitions and Supply under C.D. Howe.

GDP grew by nearly 50% in real terms between 1939 and 1945; unemployment — still at 11% in 1939 — was essentially eliminated by 1942 as the armed forces and war industries absorbed the unemployed. Women entered the paid labor force in unprecedented numbers, particularly in munitions and aircraft production. The war demonstrated that Keynesian-style fiscal stimulus worked: the deficit spending of wartime produced full employment, confounding those who had argued that budget deficits were always contractionary.

Canada’s war production was extraordinary: by 1944, Canada was producing more merchant ships than any other country except the United States and Britain, and was a major producer of military vehicles, aircraft, and explosives. The Canadian Mutual Aid program, which supplied Britain, the Soviet Union, and other allies with food, materials, and equipment on a grant basis (not loans), amounted to some $3.5 billion — roughly equal to Canada’s entire GDP in 1939.

7.2 The Postwar Settlement and the Welfare State

The postwar period, from 1945 to roughly 1973, was Canada’s golden age: sustained economic growth averaging over 5% per year, rapidly rising living standards, near-full employment, and the construction of the modern welfare state. Per capita income roughly tripled between 1945 and 1973 in real terms.

The postwar welfare state was built in several stages. The Family Allowances Act (1944) — “baby bonuses” paid to all families with children — was the first universal social program. The Hospital Insurance and Diagnostic Services Act (1957) established the framework for universal hospital coverage; the Medical Care Act (1966) extended this to physicians’ services, creating the medicare system that distinguishes Canadian social policy from the American approach. The Canada Pension Plan and Quebec Pension Plan (both 1965) provided earnings-related retirement income.

The Canada-US Automobile Agreement (Auto Pact, 1965) reorganized the North American automobile industry, allowing duty-free trade in vehicles and parts between Canada and the US provided Canadian production maintained certain proportions of North American output. The Auto Pact substantially increased Canadian automotive output and productivity while tying Canada’s most important manufacturing sector tightly to the American market.

Judith Fudge and Eric Tucker’s history of twentieth-century employment law documents how the legal framework of the employment relationship evolved from a model based on individual contract (with minimal legal protection for workers) to the pluralist postwar model in which collective bargaining rights were legislatively protected, minimum labor standards were established, and the state played a significant role in regulating the labor market.

7.3 The Structural Transformation of Canadian Industry

Alan Green’s survey of twentieth-century Canadian economic history emphasizes the transformation from a predominantly resource and agricultural economy to a more diversified industrial and service economy. In 1901, agriculture accounted for over 40% of the labor force; by 1971, it was less than 8%. Manufacturing grew to a peak of about 25% of employment in the 1950s–1960s before beginning the long decline associated with deindustrialization and the rise of services.

The resource sector — mining, energy, forestry — remained central. The oil and gas sector’s development, particularly after the Leduc discovery in Alberta in 1947, created a new western staple that would eventually dwarf wheat in economic importance. The National Energy Program (1980), which attempted to Canadianize the oil sector and direct resource rents toward the federal government, was one of the most politically divisive economic policies in Canadian history — the western alienation it generated shaped regional politics for decades.

Chapter 8: Stagflation, Free Trade, and the Modern Canadian Economy

8.1 Stagflation and the End of the Golden Age

The postwar Keynesian consensus ended with the stagflation of the 1970s — the simultaneous rise of inflation and unemployment that the standard Phillips curve trade-off said was impossible. Canada was not immune: inflation rose from under 3% in the late 1960s to over 10% by 1974–1975, driven by the 1973 OPEC oil price shock and the global commodity price inflation of the early 1970s. Unemployment simultaneously rose, reaching 7% by 1977.

The Anti-Inflation Program (1975–1978), introduced by the Trudeau government, imposed mandatory wage and price controls — a striking departure from the market-oriented consensus of postwar policy and a reflection of the degree to which stagflation had undermined confidence in conventional macro management. The controls succeeded in moderating wage growth but were economically controversial and politically unpopular.

The Bank of Canada under Gerald Bouey adopted a monetarist targeting framework in 1975, committing to gradually reduce the growth of the money supply as the mechanism for reducing inflation. This was the Canadian equivalent of the Volcker disinflation in the United States, though the Canadian version was less dramatic. The early 1980s saw a severe recession — unemployment reached 12% in 1983 — as the Bank maintained high real interest rates to break inflationary expectations. The medicine worked: inflation fell from double digits in 1981 to under 4% by 1984, and the Bank of Canada eventually shifted from monetary targeting to a inflation targeting regime, formally adopted in 1991.

8.2 The Canada-US Free Trade Agreement and NAFTA

The Canada-US Free Trade Agreement (1988) and its successor NAFTA (1994, which added Mexico) were the most significant structural changes in Canadian economic policy since the National Policy. The FTA eliminated virtually all tariffs between Canada and the United States over a ten-year phase-in period; NAFTA extended this to a three-country framework and added provisions on investment, services, and intellectual property.

The political economy of Canadian trade liberalization illustrates the Olsonian logic of collective action. The Canadian manufacturing sector had long benefited from the protection of the National Policy tariff, and threatened industries — particularly textiles, clothing, and footwear — organized effective opposition to free trade. The Mulroney government, facing a deeply divided electorate in the 1988 federal election (the “free trade election”), won a majority only because the opposition vote split between the Liberals and New Democrats.

Daniel Trefler’s American Economic Review paper (2004) — the definitive empirical study of the FTA’s effects — examines what happened to Canadian industries most exposed to tariff liberalization. The results are nuanced:

• Industries most exposed to Canadian tariff cuts (import-competing sectors) experienced employment declines of 8–15% over the decade following the FTA.
• Industries most exposed to US tariff cuts (export-oriented sectors gaining improved access to the US market) experienced productivity growth of up to 14% over the same period.
• The aggregate net effect on manufacturing employment was roughly a wash — job losses in import-competing sectors were offset by job gains in export sectors — but the distributional consequences were severe: the workers displaced in import-competing sectors were typically older, less educated, and concentrated in single-industry communities with few alternative employment options.

Trefler’s findings illustrate a general theorem of trade theory: the gains from free trade are real but diffuse; the costs are concentrated and often borne by the most vulnerable workers. The political economy of trade policy cannot be understood without accounting for this asymmetry.

8.3 The Modern Canadian Economy

Canada entered the twenty-first century as one of the richest and most open economies in the world. Real per capita income was among the highest in the OECD; the banking system — whose stability proved its value again in the 2008–2009 financial crisis, when no Canadian bank required a government bailout — was internationally admired; and the resource sector continued to generate substantial export revenues, now dominated by oil sands production from Alberta.

The 2008–2009 global financial crisis tested but did not break the Canadian model. The Harper government implemented a fiscal stimulus package — the Economic Action Plan — that combined infrastructure spending, housing tax credits, and employment insurance extensions to cushion the recession’s impact. Unemployment rose to only 8.7% at its peak in 2009, compared with 10% in the United States, and the recovery was swift.

The longer-run challenges are structural: the continuing dependence on resource exports (the “Dutch disease” debate about whether oil wealth appreciates the exchange rate and hollows out manufacturing); the adequacy of innovation investment compared to OECD peers; the housing affordability crisis concentrated in Toronto and Vancouver; and the ongoing reconciliation of the Canadian economy with Indigenous land rights and self-governance — a process whose economic dimensions (resource revenue sharing, land claims settlements, Indigenous economic development) are inseparable from its political and moral dimensions.

Alexander and Keay’s study of Canadian trade policy in the first era of globalization (1870–1913) provides a long-run perspective: Canada’s engagement with global markets has always been politically contested, institutionally shaped, and uneven in its consequences across regions, industries, and social groups. Understanding the history of that contestation is essential for thinking clearly about the choices Canada faces today.