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Thesis Statement: Even
though the great depression was the longest and most horrible financial crisis
in Canadian history, it still can be predicted and minimized for losses.Outline of Paper Structure:1.Cover page ( name, A number,
profs name, subject, etc./)2.Introduction: State the thesis
again and briefly introduce about the great depression.( about 1 page)3.Body paragraph 1: Why is it
significant in the Canadian history: Show some economic results and Impacts.(
unemployment, impact, facts, about 1.5 pages) 4.Body paragraph 2: What are
some major causes and consequences for the great depression: Political, Social,
Economic and Sheep-Flock effect. (about 2 pages)5.Body paragraph 3: Summaries
factors and trends foreshadowed the crisis and why people are not paying
attention to them.(about 2 pages)6.Conclusion (about 1 page)7.Bibliography Be 8 pages in length (double spaced, size 12 font, regular margins)Include footnotes and a bibliography to cite all works (ideas and direct quotations)Include an introduction, a clear thesis statement, and a conclusionDraw on and cite at least five secondary sources including at least 3 scholarly books and 1 peer reviewed academic journal article.i will provide the references for you.
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Review of Economic Dynamics 5, 45–72 (2002)
doi:10.1006/redy.2001.0141, available online at http://www.idealibrary.com on
The Great Depression in Canada and
the United States: A Neoclassical Perspective1
Pedro S. Amaral
Department of Economics, University of Minnesota, Minneapolis, Minnesota 55455
E-mail: [email protected]
and
James C. MacGee
Department of Economics, University of Minnesota, Minneapolis, Minnesota 55455;
and Research Department, Federal Reserve Bank of Minneapolis,
Minneapolis, Minnesota 55480
E-mail: [email protected]
Received August 15, 2001
Canada suffered a major depression from 1929 to 1939. In terms of output it
was similar to the Great Depression in the United States. However, total factor
productivity (TFP) in Canada did not recover relative to trend, while in the United
States TFP had recovered by 1937. We find that the neoclassical growth model,
with TFP treated as exogenous, can account for over half of the decline in output
relative to trend in Canada. In contrast, we find that conventional explanations for
the Great Depression—monetary shocks, terms of trade shocks, and labor market
and competition policies—do not work for Canada. Journal of Economic Literature
Classification Numbers: E30, N12, N42.  2002 Elsevier Science
Key Words: Great Depression; Canada; productivity; terms of trade; deflation.
1
We are especially grateful to Tim Kehoe, Ed Prescott, Lee Ohanian, and Hal Cole for
their comments and suggestions. Comments by Ben Bridgman, Ron Leung, Igor Livshits, and
Manuel Santos as well as seminar participants at the SED 2001 meeting in Stockholm and the
Macro Workshop at the University of Minnesota are also much appreciated. Amaral acknowledges financial support from Fundação para a Ciência e Tecnologia. The views expressed
herein are those of the authors and not necessarily those of the Federal Reserve Bank of
Minneapolis or the Federal Reserve System.
45
1094-2025/02 $35.00
 2002 Elsevier Science
All rights reserved.
46
amaral and macgee
1. INTRODUCTION
Canada suffered a major depression from 1929 to 1939. In terms of output, it was similar in both timing and magnitude to the Great Depression
in the United States. This has led some to conclude that the two episodes
were essentially identical and share a common explanation (Betts et al.,
1996; Siklos, 2000).
The declines in output, productivity, and employment were very similar.
However, the recoveries, though very similar in terms of output, were different in two important respects. In Canada, productivity did not return to
trend as it did in the United States, while employment recovered more.
The recovery in U.S. productivity led Cole and Ohanian (1999) to conclude that the slow recovery of output per adult in the United States was a
puzzle. Cole and Ohanian (2000b) argue that cartelization and labor market policies can resolve this puzzle. However, in Canada there is no puzzle
because productivity did not return to trend. We found that Canada did not
follow the policies that Cole and Ohanian argue gave rise to the incomplete
recovery in the United States. Our conclusion is that the main reason that
Canadian output per adult was still 30% below trend in 1938 was that productivity failed to return to trend.
Trade accounted for roughly half of Canadian output. A conventional
view is that Canada imported the Great Depression via a collapse in its
terms of trade. We find that this terms of trade shock has a negligible
effect on output in standard models.
A voluminous body of research has developed on the role of deflation in
the Great Depression. We consider four standard transmission mechanisms
that operate through either the credit market or the labor market. We find
that these stories fail to account for the 10-year Canadian depression. These
stories are not consistent with the 1920–1922 deflation, which was similar in
magnitude to the 1929–1933 deflation. Also, these stories are inconsistent
with the slow recovery.
Given our findings we conclude that any successful theory of the Canadian 10-year depression should explain why productivity was so far below
trend for so long. Any explanation should also be consistent with the fact
that productivity recovered in the United States.
2. DATA ON THE GREAT DEPRESSION IN CANADA AND
THE UNITED STATES
This section presents some macroeconomic data on the Canadian and
U.S. economies during the Great Depression. We establish two main points
in this section. First, Canada experienced a decline in output between 1929
great depression in canada
47
and 1939 that was large and quantitatively very similar to that of the United
States.2 Second, in contrast to the United States, Canadian total factor
productivity (TFP) was well below trend throughout 1929–1939.
We use the neoclassical growth model to organize the data. As a result,
we look at per adult variables. Unless otherwise stated, all data are divided
by the number of people older than 14 for Canada and older than 16 for
the United States.
We detrend all variables that grow at the same rate as output in a balanced growth path at a 2% yearly rate. This trend rate is close to the
long-term average growth rate for both the United States and Canada. In
detrending, we have taken the view that the growth in production efficiency
due to increases in the stock of usable knowledge is smooth. Other things
being equal, this gives rise to a yearly growth rate of GDP per adult of 2%.3
Real Data
As we can see from Table I, the behavior of real output in the two
countries was very similar. By 1933 both countries were roughly 40% below
trend. The recovery was very protracted in both countries, with the United
States recovering slightly faster than Canada. By the end of the decade,
U.S. output was still 25% below trend while Canada’s was almost 30%
below trend.
Relative to trend, consumption fell more in Canada and remained below
that of the United States throughout the 1930s. Investment in Canada fell to
15% of its trend value by 1933 and recovered very slowly in both countries
(remaining roughly 50% below trend in 1939). Government purchases in
the two countries followed a similar pattern during the downturn, before
diverging in the late 1930s when U.S. government spending remained above
trend, while in Canada it fluctuated about trend.
Having looked at the product side, we now turn to the input side. We
first calculate TFP, the part of output growth that cannot be attributed to
input growth. We do this using the production function,
Yt = At Ktθ Ht1−θ
(1)
Henceforth, capital letters denote aggregate variables, while lowercase
letters denote household variables. Y is aggregate output, K is aggregate
capital, H are aggregate hours, and A is the TFP factor.
1939
Given values for Yt Kt Ht 1939
t=1929 and θ we can compute At t=1929 .
The parameter θ is the share of product that accrues to factor payments
2
We look at 1929–1939; however, Canadian GDP per adult peaks in 1928.
Average per capita GDP growth in Canada over the twentieth century is actually slightly
higher than that in the United States.
3
48
amaral and macgee
TABLE I
Detrended Levels of Real Output and Its Components: 1929–1939
Year
Can.
GNP
U.S.
GNP
Can.
cons.
U.S.
cons.
Can.
inv.
U.S.
inv.
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
100
91.6
77.0
66.5
59.6
64.5
67.1
67.5
71.8
69.7
72.4
100
87.7
79.7
65.9
62.0
65.3
71.5
76.4
80.0
73.2
76.1
100
92.6
81.9
73.4
66.9
67.7
67.9
67.1
68.8
66.2
65.7
100
89.7
83.8
74.2
70.4
70.5
71.9
76.2
76.5
72.7
73.8
100
85
50.5
24.8
15.2
28.5
32.9
28.2
44
42.8
52
100
69.2
46.1
22.2
21.8
27.9
41.7
52.6
59.5
38.6
49
Year
Can.
govt.
U.S.
govt.
Can.
exp.
U.S.
exp.
Can.
imp.
U.S.
imp.
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
100
104.8
104.6
97
81
101
101.1
94.6
98.1
108.9
102.8
100
105.1
105.3
97.2
91.5
100.8
99.8
113.5
105.8
111.5
112.3
100
77
58.7
51.8
51.9
60.7
65.2
75.9
79.2
64.9
67.4
100
85.2
70.5
54.4
52.7
52.7
53.6
55
64.1
62.5
61.4
100
81.6
58.6
49
44.1
48
49.3
53.4
59.6
50.9
52.3
100
84.9
72.4
58
60.7
58.1
69.1
71.7
78
58.3
61.3
Note. Cons. is consumption, inv. is investment, govt. is government purchases, exp. is
exports, and imp. is imports. The Canadian data are from Historical Statistics of Canada,
Series F1-13. The U.S. data for GNP are from Kendrick (1961), and those for the different
components are from Cole and Ohanian (1999).
to capital. From both countries’ national accounts we get θCAN = 0 3 and
θU S = 0 33.
Table II presents the computed series.4 Notice that TFP in the United
States (TFP U.S.) recovers much faster than TFP in Canada (TFP Can),
and it is back to trend by the end of the decade. This pattern is the same
for output per hour. Two questions emerge right away: Why did TFP fall so
much in both countries, and why did it not recover in Canada? We return
to these questions later in the paper.
4
Note that TFP is not detrended at a rate of 2% but at a rate equal to 1 021−θ for each
country, a trend that is close to the historical averages (excluding war periods).
great depression in canada
49
TABLE II
Detrended Inputs
Year
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
TFP Can.
100
99.49 92.04 90.25 85.29 85.43 87.95 87.79 88.69 89.33
93.60
TFP U.S.
100
93.27 91.15 83.34 80.35 86.91 93.89 96.38 99.63 97.33 100.1
K Can.
100
96.93 92.43 86.68 80.95 76.21 72.38 68.87 66.2
63.85
62.04
K U.S.
100
98.55 96.16 92.23 87.27 82.64 79.26 76.61 74.97 73.11
71.05
H Can.
100
91.70 83.32 72.70 69.18 77.42 79.52 82.43 88.66 86.36
86.19
H U.S.
100
91.92 83.57 73.41 72.62 71.73 74.72 80.63 83.03 76.25
78.68
Note. Canadian capital data are from Brown (1965, p. 199, Series 5). The U.S. capital
data are from Kendrick (1961, Table A-XV). The U.S. hours data are from Kendrick (1961,
Table A-X). Canadian hours data are Series C-51 from Urquhart (1965) multiplied by average
hours worked in non-agriculture, Series D-409. We used GDP from the National Income and
Expenditure Accounts (1988). U.S. GDP is from Kendrick (1961). U.S. population is from U.S.
Bureau of the Census (1965).
We are aware that what is presented in Table II is not TFP, but measured
TFP. There are a number of reasons why measured TFP may differ from the
actual TFP. One major issue is factor mismeasurement. In terms of capital,
there is the issue of capacity utilization. In terms of labor, there is evidence
that the reduction in employment was much more severe for unskilled than
for skilled workers. We used Ohanian’s (2001) estimates for the United
States for the magnitude of these factors and recomputed TFP. We found
that these two factors roughly cancel each other, so that measured TFP is
almost unchanged.
Another measurement question relates to what Bernanke and Parkinson
(1991), among others, term labor hoarding. However, 10 years seems to be
too long a period for this argument to make sense.
Finally, there is the issue of sectoral compositional effects. We could only
compute TFP for manufacturing. Manufacturing TFP is similar to aggregate
TFP.
The measured TFP is completely determined by the path of the inputs.
So we now look at the inputs.
Table II reports the capital stock for both countries (K Can and K U.S.).
The most important feature regarding the capital stock is that it declines by
more in Canada than it does in the United States. This result is not due to
higher depreciation and is in contrast to the investment figures in Table I.
Thus, there are problems with the capital stock data. Do they affect the
qualitative results in terms of the measured TFP? We think they do not. If
anything, Canada’s capital stock declined by less than the value reported
in Table II. This suggests that adjusting for possible measurement errors
50
amaral and macgee
in the capital stock would imply that TFP in Canada was even lower than
reported.
Table II also compares total hours worked for the two countries (H Can
and H U.S.). Total hours are the product of the number of people employed
and average hours worked. The series for Canada was computed using
average hours for the nonagricultural sector, since a series for the whole
economy (or for agriculture) was not available. This is likely to lead us to
overestimate the fall in labor input in Canada, as agricultural hours in the
United States (and most probably in Canada) fell by less than nonagricultural hours.
The main difference in measured TFP lies in the employment data. During the recovery period, total hours in Canada recovered more than did
total hours in the United States. The question about the lack of recovery
of TFP in Canada relative to the United States can now be posed as: Why
did total hours recover faster in Canada than in the United States?
We now compare the private nonagricultural sectors in the two countries.
This is an interesting disaggregation for several reasons. First, aggregate
employment and output figures were influenced by different government
policies toward public works and relief spending.5 Second, agriculture was
hit by identifiable weather shocks in both countries. Also, the agricultural
sector is a relatively small6 fraction of GDP.
As Table I documents, U.S. government output increased more relative
to trend than Canadian government output. A large part of the difference
in government expenditure can be attributed to different government policies toward providing unemployment relief. In the United States, the government relied much more heavily upon make-work projects (government
relief projects) than in Canada. The fraction of the workforce employed by
the government doubled in the United States, while increasing by less than
50% in Canada. The increase in U.S. government employment was mainly
due to public works, as nearly 7% of U.S. employment in the late 1930s was
in relief projects. Relief workers were never more than 1.5% of the total
number of employed people in Canada. (See Amaral and MacGee, 2001,
for more details.)
Table III reports TFP for the private nonagricultural sector. The calculation method and the shares used were the same as those for aggregate TFP.
We also use the same series for capital as before. We assume that the private nonagricultural sector benefits from the services of government-owned
capital. Total hours in Canada equal the product of employment in the
5
Government enterprises are included in the private sector.
Agricultural GDP as a fraction of total GDP averaged 6.2% in the United States and
10.4% in Canada from 1929 to 1939.
6
great depression in canada
51
TABLE III
Detrended Private Nonagricultural TFP
Year
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
Can.
100
99.32
92.43
92.36
88.34
85.23
87.03
88.6
88.3
88.75
93.52
U.S.
100
93.56
88.72
82.17
79.79
87.75
90
97.43
94.59
94.26
96.49
private nonagricultural sector and average hours in nonagriculture. Total
hours for the United States are from Kendrick (1961).
In Canada, TFP in this sector is very similar to aggregate TFP. U.S. TFP
in this sector behaved differently from aggregate TFP during the recovery
period, since it stopped recovering in 1936, while aggregate TFP recovered
continuously and was back to trend by 1937. This, we claim, is a major difference between the Canadian and U.S. experiences in the Great Depression.
The comparison of the private nonagricultural sectors reinforces our earlier conclusion that the two countries look very similar during the downturn
(1929–1933). However, this sectoral breakdown provides new insights into
the recovery period. It suggests that in the United States, something happened around 1936 that induced a decrease in productivity. In Canada,
the data reinforce the aggregate data—namely, that productivity did not
recover relative to trend during the Great Depression.
Nominal Data
Given that much research on the Great Depression has focused on the
role of monetary shocks, we present data on nominal variables that are
central to monetary business cycle theory. As Tables IV and V show, the
onset of the Great Depression coincided with a decline in money supply
and price levels of approximately 20% in both Canada and the United
States. This deflation was accompanied by a decline in nominal interest
rates, although real ex post rates were high by historical standards.
A cross-country comparison of interest rates is limited by the fact that
a market in short-term government securities in Canada did not exist
before 1934. The available data suggest that nominal interest rate spreads
increased from 1930 to 1932, before narrowing. Short-term interest rates
on government bonds did not fall as quickly as U.S. short-term rates did.
This increase in the interest rate spread from 1930 to 1932 appears to be
linked to differences in monetary policy.
Canada was the first country to leave the gold standard, suspending gold
shipments in January 1929 (Bordo and Redish, 1990). Despite the suspension of convertibility, the Canadian government took steps to prevent
depreciation of the dollar, motivated in part by a wish to maintain access
52
amaral and macgee
TABLE IV
Nominal Money, Prices, and Interest Rates in 1929–1939 in Canada
Year
Monetary
base
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
100
88.48
79.34
78.06
77.50
78.10
85.85
93.04
101.96
108.09
116.59
Price
level
M1
100
89.65
83.16
72.44
70.95
73.19
80.00
84.62
93.63
92.77
99.08
100
97.52
91.46
82.92
81.54
82.64
82.92
85.67
87.88
87.88
87.05
3-month
T-bill
Short-term
dom. bonds
Comm.
paper





2.83
1.249
0.753
0.763
0.676
0.808
5.34
4.87
4.43
5.08
4.15
2.91
2.29
1.61
1.93


5.31
5.28
5.64
6.6
6.49
5.27
4.76
4.12
3.95


Note. The monetary data are from Metcalfe et al. (1996), and the GNE deflator (price level)
is from Historical Statistics of Canada. The 3-month T-bill rate is from Historical Statistics of
Canada (H588–603). The short-term Dominion bonds and the corporate paper rate are from
Nixon (1937).
to U.S. capital markets to refinance Dominion debt (Shearer and Clark,
1984). As a result, the government maintained the advance rate at its 1928
level throughout 1930, despite the fall in world rates. This policy was ultimately abandoned in 1931. Despite this, the Canadian dollar did depreciate
relative to the U.S. dollar by approximately 15% between 1929 and 1931,
before recovering to its 1929 level in 1935.
TABLE V
Nominal Money, Prices, and Interest Rates in 1929–1939 in the United States
Year
Monetary
base
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
100
95.9
98.7
104.3
108.9
119.8
139.2
157.2
168.5
181.5
215.5
M1
Price
level
100
94.4
85.6
74.5
69.9
78.0
91.0
102.1
102.9
102.2
113.7
100
97.0
88.1
78.4
76.7
83.2
84.8
85.2
89.4
87.2
86.6
Note. Data are from Cole and Ohanian (1999, Table 8).
3-month
T-bill
Comm.
paper
4.4
2.2
1.2
0.8
0.3
0.3
0.2
0.1
0.5
0.1
0.0
6.1
4.3
2.6
2.7
1.7
2.0
0.8
0.8
0.9
0.8
0.8
great depression in canada
53
We suspect that the data reported dramatically overstate the difference
in commercial paper rates in the late 1930s. Neufeld (1972) presents the
commercial paper rate reported by Moody’s for Canada and the United
States. His data suggest that while the spread between Canadian and U.S.
corporate paper widened from 1930 to 1932; it then dramatically narrowed
and remained under 1% from 1934 to 1939.
The data suggest that while monetary shocks may help explain the 1929–
1933 downturn, it is unlikely that they played a significant role in the protracted recovery from 1934 to 1939. In both countries, the deflation ended
by 1933 and both nominal and real interest rates remained low by historical
standards.
Summary
We view the different behavior of TFP (together with the behavior of the
labor input discussed below) as the main difference in the two countries’
experiences during the recovery pe …
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