- A system of government that allocates/divides power between the federal
government and the various regional governments.
- It involves the allocation of lawmaking power to those various regional
Definition of a State
- Geographically defined entity that exists under one political structure without
being subject to another political authority.
Dual Challenge of Federalism
- The federal authority must attempt to appease the regional interests.
- Redistributing Canada’s wealth fairly over all the regions.
Difference between US and Canada Governments
- Canada: all power not specifically reserved for regional governments are allotted
to the federal government.
- US: all power not specifically reserved for the federal government are allotted to
the regional governments.
The Government of Canada:An Evolution
- France was the first nation to colonize Canada.
- France ceded its Canadian possession to Great Britain after the Seven Years War
- Much of the religious, political, and social culture in Early Canada remained the
- Canadian entity began to emerge after the War of 1812 (US vs. Great Britain &
Canada) due to mistrust towards theAmerica.
Development of Canadian Federalism
Fathers of Confederation felt that the American government had given the
individual states too much power and did not want to repeat the same mistake
(Shay’s Rebellion, 1786-1787).
- The need for a federal government was urgent due to the worry that Canadian
colonies were the targets ofAmerican aggression.
- Economic benefits for the individual colonies.
- A country’s constitution defines the powers and the limits of powers that can be
exercised by different levels of government.
- The British North American Act in 1867 formed a constitution known as the
Dominion of Canada which was consisted of Upper and Lower Canada (Ontario
and Quebec), Nova Scotia and New Brunswick.
- The Constitution continued to rule in power until 1982. Canada’s Economic History
- Abundance of fish off of the eastern coasts.
- The fur trade soon outdistanced fishing as the major economic activity.
- Fur trade led to the development of the Hudson’s Bay Company, which was the
largest trading company across Canada.
- Timber soon replaced the fur trade in importance as Great Britain needed large
amount of timber to build its fleets, and Canada had timber in abundance.
National Policy (1879) Introduced by JohnA. Macdonald
- It sought to strengthen the Dominion of Canada both at home and abroad.
- Based on high tariffs to protect Canada’s manufacturing industry, US firms were
“dumping” goods into Canada at a much lower price.
Construction of a transcontinental railway to link the two coasts of Canada and aid
in the movement of goods.
- Encouragement of immigration to Western Canada.
- Protectionism is the economic policy that seeks to restrain trade between states
through methods such as tariffs and restrictive quotas.
Impact of Federalism on Business in Canada
- 60% of Canada’s population live in Ontario and Quebec.
- The majority of manufacturing occurs in this region.
Equalization of Wealth
- Equalization payments enable less prosperous provincial government to provide
their residents with public services that are comparable to those in other
- Equalization reduces fiscal disparities among provinces to equalize their fiscal
capacity, that is, their ability to generate tax revenues.
Federal Government Interventions in Businesses
- Tax incentives, cash grants, loans, bailouts. Diamond of Sustainable Growth
- Home plate : Non-predatory government
- First base: an efficient financial system
- Second base: entrepreneurs
Third base: modern management
- It starts at home plate, and then progresses through each base, then arrives again
safely at home.
- Canada: home plate – under Britain’s control, a distant government; first base –
limited banking institutions; second base – less credit and loan, less entrepreneurs;
third base – limited business growth led to a slow development of modern
- US: home plate – non-predatory government sought to encourage economic
development; first base – modern banking institutions; second base – availability
of credits and loan encouraged entrepreneurship; third base – economic growth
encouraged efficient management.
- A collection of ideas that help form the basis of the public policy development and
allow us to view things in a common way.
- Dominant ideology: a set of values, beliefs shared by the majority of people in a
- Canada’s dominant ideology – political: liberalism, conservatism, democratic
socialism; economic: capitalism
- Liberalism emphasizes the importance of individual rights, freedom of religion,
freedom of speech, free trade, a right to life, liberty, and property.
- Dominant political ideology in Canada since the 1940s.
- Conservatism emphasizes the importance of tradition and continuity (peace, order,
- It is skeptical of rapid change.
- It promotes strong defense and centralized authority/government.
- It advocates a democratic political system alongside a socialist economic system.
- Government should play an interventionist role in the management of the
economy and markets to achieve an equal distribution of income and
- Trade, industry and means of production are controlled by private owners.
- Free markets guide the decisions under capitalism. Canada’s Changing Ideology
- Canada 1867: early mix of liberalism and conservatism.
- 1930s: depression led into democratic socialism.
- Until the mid-1980s, Keynesianism predominated the economy.
- Mid-1980s, rise of Neo Conservatism.
- Current: Keynesian theory predominates the economy again.
- The Bank Act of 1871 created a financially sound currency and a nationally
regulated banking system.
- The branch banking system was sufficient until the depression.
- Aroyal commission in 1933 studied the need for a central bank.
- The commission recommended the establishment of a central bank in 1934.
- The Bank of Canada was first privately owned, but nationalized in 1938.
- Four key regulations of the Bank Act of 1871: financially sound currency, a
nationally regulated banking system, legislation passed in regulating insurance
companies at federal level, and mortgage and loan companies at provincial level.
- It issues currency, regulates money supply, and control interest rates.
- It is separate from government to protect it from political interference.
- Banks are required to maintain a portion of deposits at the central bank in the form
of a reserve.
- It acts as the lender of last resort.
The money value and supply (monetary policy) is controlled through the interest
Monetary Policy vs. Fiscal Policy
- Monetary policy is actions undertaken by the central bank to achieve certain
- Fiscal policy is the tax revenue and spending initiatives of the government.
Overnight Interest Rate
- Rate at which banks borrow and lend money to each other.
- At the end of the day, banks with surpluses lend to those that have deficits.
- The more money available in the economy, the lower the rate is.
Milton Freidman (1912-2006)
- Expansion of money supply leads to inflation.
- Changes to real interest rate generated by monetary policy are offset by market
adjustment in response to excess money supply/demand.
- His views on monetary policy form the policy of many neo-conservative
governments. US Federal Reserve System in 1913
- It set up due to a financial crisis in 1907 (people losing faith in banks started bank
- It is independent from government.
- It keeps interest rate artificially low after 2001 recession, causing housing bubble.
- It creates too much money, driving down the US dollar value.
It interferes too much in the economy.
- One of the causes of the current economic crisis.
Financial Services in Canada
- 6% of Canada’s GDP in 2007.
- Banks, trust and loan companies, credit union, and insurance companies.
- Banks are the largest sector, accounted for half of the value of the entire sector.
- US financial services industry accounted for 8.4% of their GDP.
US Financial Services Industry
- The Banking Act of 1933 (Glass-SteagallAct) restricting speculative trades.
- Glass-SteagallAct separated commercial banking from investment banking.
- The Act kept individual businesses relatively small, since they can only grow in
- TheAct was replaced by the Gramm-Leach-BlileyAct in 1999.
- GLB Act allowed various companies to merge.
- Banks still could not own non-financial companies, nor could other companies
Requirements for reserve in banks are downgraded.
- One of the causes of the economic crisis, because the Act created companies that
are “too big to fail”.
Oversight of the Canadian Financial Services Industry
- 90% of insurance companies are regulated under the Federal Insurance Companies
- Office of the Superintendent of Financial Institutions oversees financial
Office of the Superintendent of Financial Institutions 1987
- Office of Inspector General of Banks (mid-1920s) + Department of Insurance (late
- The need to review Canada’s financial system was brought up in 1984.
- The failure of the Canadian Commercial Bank and the Northland Bank in 1985
spurred the need for change.
- Two functions: regulation and supervision.
- Regulation: setting guidelines for the financial institutions and reviewing and
approving requests from those institutions.
- Supervision: assessing the soundness of the financial institutions to make sure they retained the required amount of capital to operate.
- Canada: the federal government has the power to regulate and charter banks; US:
the federal government has no direct power to do so – individual states have that
- Americans have long had distrust towards centralization of power and government
oversights, preventing the development of nation-wide branch banking.
US Sub-Prime Mortgage Crisis
- After the internet bubble burst in the early 21 century, interest rate was kept very
- Low interest rate led to housing bubble.
- Banks did not properly assess the risk associated with some of the mortgages.
- People soon realized how high the inflation was, so they stopped investing their
money in banks and other activities, which in turn caused banks to collapse
because they were holding a large number of undervalued assets.
Avoidance of Sub-Prime Mortgage Crisis by Canada
- Banks do not loan money to people who can’t pay back.
- Mortgage interest is not tax-deductible which does not encourage over-borrowing.
- It began as an insurance company.
- In 1985 it began to expand into new ventures.
- It began to offer Guaranteed Investment Certificates (guarantee of full return on
investment) at higher rates.
- In 1987 it continued to expand.
- Because of higher interest rates paid, profit margins were lower. It began to offer
- In 1989, regulators finally realized how far the company had expanded into the
real estate operations, with over 70% of its asset tied into the operations.
- In the early 90s, the company found itself at risk due to volatile mortgages.
- The government had to take action and seize control of the company in 1994,
because it is “too big to fail”.
- Another example for “too big to fail” is the CNR, origin of which was the
privately owned Canadian Northern Railway.
Canadian Bank Mergers proposed in 1998
- RBC with BMO and CIBC with TD.
- Public has concerns that the banks might have too much power.
- Mergers rejected by the government. Mixed Economy
- It contains both private ownership and state-ownership of the means of
- It allows for private financial decisions by businesses and individuals.
Government has the power to override these decisions through legislation.
- It is governed by the law of supply and demand. Prices are determined by supply
- Agriculture, forestry, mining and fishing and energy.
- Manufacturing, public utilities, food processing, construction.
- In the long term it could diminish a domestic firm’s ability to compete with other
- It contrasts with the free trade.
- It correlates to mercantilism, which aims at accumulating monetary reserves
through a positive balance of trade by limiting imports.
- Types of protectionism: tariffs, subsidies to domestic producers that allow them to
sell goods more cheaply, import quotas, and manipulation of currency value.
- Agriculture often receives subsidies and manufacturing industry protected by
- The Dust Bowl (dust storms) during the Depression helped to create farm
subsidies in the US.
- Farmers will be paid to grow less; no overproduction. But overproduction would
be purchased by the government.
- These subsidies lead to great distortion in international trade.
- After NAFTAwas signed in 1995, Mexican farmers, who were protected by heavy
tariffs, couldn’t compete once the tariffs were removed and Mexico could not
match the US subsidies.
- It controls the amount of production and prices as all products must be sold via a
marketing board, which drastically limits competition.
The Corn Laws introduced in 1815
- It allows British colonies to ship their agricultural products with limited tariffs
back to Great Britain. - It is very beneficial for early Canadian agriculture.
- Free trade pressures from industrialists (if food became cheaper, employee would
be paid less.) led to its repeal in 1846.
- Canadian farmers had to look for new markets.
- It causes job loss as cost of jobs done abroad can be a lot cheaper than that of jobs
- It encourages global competition.
ReciprocityAgreement of 1854
- Canadian agriculture was in search for a new market due to the appeal of the Corn
- The treaty provided tariff-free access to more than 90% of the existing trade
between the two countries.
- Tariffs were reduced on many non-manufactured products. A 20% tariff on
manufactured goods by the Galt Tariff of 1858 (Canada’s first protective tariff).
- Canadian exports to the US increased four-fold in the decade after 1854.
- American civil war and the desire by American businesses to return to
protectionist ways led to its repeal in 1866.
- This repeal helped to push Canada towards Confederation.
- Tariffs on raw materials were lower to help manufacturers.
- Not popular in Western Canada as it made agricultural equipment more expensive.
- But popular in Ontario and Quebec as they were the centers of manufacturing.
- Manufacturing played a relatively small role in Canada’s economy.
- Raw material industries suffer due to the policy.
- Restrained Canada from global competition, prices were higher as a result of no
ReciprocityAgreement of 1911
- The West, seeking markets for its agricultural products, approved and supported
- The central Canada, manufacturing businesses were against it.
- The powerful manufacturing interests formed allegiance with and financing the
- Liberals lost the election; it was put on hold until 1989.
GeneralAgreement on Tariff and Trade
- Foundation of the WTO trading system.
- It proposes to limit tariffs and trade barriers.
- WTO was created in 1995 to replace the GATT, as GATT was not an organization
but a legal arrangement. - It formalizes free trade agreements between nations.
The Smoot-Hawley Tariff Act in the US in 1930
- Response to the great depression.
Retaliatory tariffs rather than help recovering the economy.
- It caused ensuing retaliatory tariffs by US trading partners.
- The Masseys started renting land and clearing the timber, selling the timber and
using the profits to buy the rented land, and then selling it as a clear farmland.
- With the influx of settlers, farmland was highly desired.
- Daniel Massey, founded a new farm implements business in Newcastle in 1847,
obtained license to purchase from US manufacturers. Purchasing existing licenses
freed Massey from the cost of developing their own products and no tariffs were
- Hart Massey, imported the latest machinery and modified them to suit the needs of
- The new Grand Trunk Railway linked Toronto to Montreal (1856); his factory in
Newcastle had access to this rail link.
- Scarcity of labour made it necessary for farmers to become more automated.
- Limited transportation prevented foreign competition from being developed.
- Reciprocity Treaty of 1854 allowed Massey to import timber cheaper (lowering
his input cost) and allowed farmers to import coal cheaper (coal needed to power
- Open trade with Britain allowed Massey to import British steel which improved
his product quality.
- Being chosen to represent Canada at the 1867 International Exposition in France
was a huge benefit to Massey as Massey products proved to be far more superior
and efficient compared to those in the European countries.
- Massey started export to Europe, and it was cheaper than exporting to the Western
- Because of success in European market, Massey failed to establish a strong base
for competitions in the US and the Western Canada.
- National Policy laid higher tariffs on US steel to encourage the sale of domestic
steel which could not fill the demand of Massey Company, forcing the company to
purchase steel from the US.
- It merges with the Harris Company to remain successful in this new economic
- Government offered back 99% rebate on tariffs paid on US materials used to make
implements for export (1894). TheAutomobile Industry
- Canada is the only major car producing nation to not produce a domestic car.
Car Manufacturing History in Canada
The first Canadian car manufacturer was Gordon McGregor licensing of Henry
Ford in Canada in 1904.
- Ford of Canada was started in Windsor.
- In Oshawa in 1907, Robert McLaughlin founded the McLaughlin Motor Car
Company (later sold to GM in 1918) and started producing cars using the Buick
- Many small carriage companies switched to produce motor cars, but th