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ECON 2P19 (11)

Chapter 14.docx

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Indra Hardeen

Chapter 14 – World War 1, 1914-1918 The Economic Impact of the War • Capital imports, all but collapsed by 1915 • Construction continued its collapse from the previous year, hitting bottom in 1915 • In 1917 and 1918, Canada actually became a net capital exporter • Supply constraints were also felt in the labour market • Additionally, the long standing inflow of immigration into Canada slowed to trickle as the war disrupted the normal patterns of resettlement • Investment spending declined in relative terms, returning to a share of the GNP more like the share it had at the turn of the century as the wheat boom was getting underway • Foreign capital inflows were negligible in 1916 and became negative in 1917 and 1918 • Agriculture maintained its relative share of the GDP in this decade, for the first time since the 1870s • Manufacturing activities grew slightly faster than the GDP, rising to contribute over ¼ of final output in 1920 • Service industry output rose relatively slowly, on the other hand, with the result that its share of the GDP declined for the first time The Role of Government • The government faced two separate, challenges in converting the economy from a peacetime to a wartime basis • First, it had somehow to lay claim to the goods and services it needed to conduct its war effort • With aggregate capacity at its limit, the only recourse was to increase its share of domestic output at the expense of private demands, particularly private consumption spending • During much of the war, the government’s position was that this additional expenditure should be financed largely through debt • Traditionally, Canadians had looked abroad to wealthier and more developed pools of capital to handle their debt requirements • The railways and many of the other great projects of the Dominion had drawn their funds from the seemingly limitless British investment markets • With its limited access to foreign borrowing, the federal government had no choice but to appropriate a larger share of domestic output • There were three ways that it could to this: domestic borrowing, increased taxation, and printing money • In the pre-war era, the budgets of the Dominion government had certain striking characteristic • First, by any modern standard, they were minuscule • Second, it spite of occasional grumbles from British investors, overall Canadian debt was small • Revenue came from indirect taxation – customs duties, excise taxes, and non-tax receipts such as those of the post office • When war came, domestic loans were not seen as a meaningful source of funds • In response to growing fiscal and political demands, the government moved into direct taxation • First of all, since the war had been financed largely through the use of debt, the government had to increase its revenue, at least to the point where it could handle the service charges on that new debt • Second, there were other long term costs associated with the war • The most important of these was the commitment to veterans in disability allowances, pensions, and other payments • Finally, the federal government financed a portion of its wartime expenditures through the simple expedient of printing money • The Finance Act of 1914 contained four important provisions with respect to war finance • First, the federal government suspended the redemption of Dominion notes ain gold, thereby taking Canada off the international gold standard • Second, the chartered banks were allowed to meet their liabilities to the public with their own note issue instead of gold or Dominion notes • Third, the chartered banks could use the excess circulation privilege year round instead of just during the harvest season • Fourth, the government could advance Dominion notes to chartered banks upon the pledge of satisfactory securities Meeting Wartime Needs Manufacturing • Until 1914, Canadian manufacturing had been the protected infant of the
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