Oddly, and ironically, the proud process of nation building contributed to the economic disaster that followed. Greed and over-optimism cost Canada dear. The country was a victim of its own ambitions. We were so ecstatic over the triumph and success of the first Pacific railway that we went railway mad. One railway wasn’t enough; we had to build three – an extravagant and wasteful venture. The new lines often ran parallel to one another even in long stretches of unproductive land. When the railway craze ended and the new railways went broke, the government was forced to take them over. But it was the taxpayers and not the bondholders who were saddled with the crushing debt of the hybrid CNR.
Canada was in hock to strangers. Almost half the public debt and four-fifths of the private debt were in foreign hands. The West was built on borrowed money. Everything from new towns to family farms was mortgaged at interest rates that would remain fixed when wages and prices tumbled. Yet the day was coming when deflation would bump up the real rate of interest from 6 per cent to 10 per cent.
Nobody worried about that. The railway binge was followed by another building binge – railway stations and hotels, skyscrapers and factories. In 1927, to the hosannas of the people of Toronto, the golden-haired heir to the throne had, at last, opened the Union Station, that granite and marble temple to the age of steel and steam. Now, in 1929, Torontonians were boasting that they had the largest hotel and also the tallest building in the British Empire, which really meant the tallest building in Canada, since the rest of the empire had yet to be seduced by the North American craze for skyscrapers. The changing skylines of Canadian cities hinted at prosperity and progress. A new Hotel Vancouver was rising on the West Coast, while the fashionable Empress in Victoria and the equally fashionable Chateau Laurier in Ottawa had expanded with luxurious new wings. The Royal Bank opened its splendid new head office in Montreal. The Toronto Star got itself a skyscraper; Eaton’s built a new art-deco store on College Street, just a block from the future site of the new temple to hockey that Conn Smythe was planning.
The building boom went too far. After the stagnant war years manufacturers scrambled to put up new plants to boost productivity through new devices and to build fat inventories. By the summer of 1929 the country was stuck with a surfeit of goods nobody wanted. The boom had distorted the employment situation. When construction stopped, jobs vanished. Even before the crash, Canadian unemployment figures were rising. Investment in an overdeveloped, overstocked country made little sense, and speculative money started to dry up. But spending increased. The automobile had touched off another orgy of expansion. New roads had to be built on borrowed money, new suburban homes financed with mortgage loans. Dazzled by prosperity, people were spending more and saving less, living beyond their means on the instalment plan.
John A. Macdonald’s National Policy, which had worked so well in the nineteenth century, was outdated. Build a railway to the Pacific, Macdonald had decided; use it to populate the West, to haul wheat to the seaports, to carry Eastern manufactured goods, protected by high tariffs, to the settlers. But the railways were overbuilt, the good land was gone, the immigration flow was down to a trickle, the Eastern goods cost too much because of the tariff, and the foreign markets were drying up. Every nation was taking the high tariff route, halting the international flow of goods and resources.
Canada lived – thrived – on its exports, chiefly wheat and newsprint and to a lesser extent hydroelectric power and base metals. If foreigners didn’t want to buy these natural resources, the country was in jeopardy because there weren’t enough Canadians to consume them. The West provided the world with 40 per cent of its wheat, but by 1929 the wheat economy was in trouble, partly because of the drought but also because the wheat pools, which collected and marketed the farmers’ grain, refused to believe the signs and portents from abroad. The Europeans had recovered from the war and were growing their own wheat. The price dropped, but the pools held back, hoping for bigger profits, even though the elevators were bursting with unsold grain. Once again greed and optimism were Canada’s undoing. Her former customers turned to Australia and Argentina, and Canada, in spite of the poor crop in 1929, was stuck with a glut of grain.
The pulp and paper industry had also been seduced by good times, overexpanding blindly and at a terrifying rate. In the twenties, production doubled but the price tumbled from eighty-two to sixty-two dollars a ton. And there was only one major customer, the United States, which bought 90 per cent of the output. If the U.S. economy faltered, Canada was in trouble.
Though few realized it, the country was in a precarious position. Canada’s export trade accounted for a quarter of her gross national product, and so she was at the whim of an international buyer’s market. If the Americans stopped buying automobiles, the country would be stuck with unsaleable base metals. And when Spain, Portugal, and Italy put a high tariff on imported dried cod, Atlantic fishermen would suffer.
The impact of the Depression on Canada was compounded by a fickleness of nature that seemed to have been ordained on high. The setting was that vast triangle of land that takes its name from Captain John Palliser, an explorer sent out by the British government in 1857 to assess the agricultural potential of the soil. Palliser turned in a gloomy report. A triangle of arid plains, he wrote, extended from the Waterton Lakes in Alberta to what is now Boissevain, Manitoba, having its apex at the 52nd parallel of latitude, the site of the modern city of Saskatoon. In most of this huge area he considered farming to be impossible. He wrote of short grass that formed no turf, tracts of loose sand and stiff clay baked under “the influence of early spring into a hard cracked surface, that resists germination of seeds.” The farmers of the thirties would have reason to sympathize with Palliser, whose expedition had experienced “great inconvenience” in traversing the triangle “from want of wood, water and grass.”
Palliser had seen the prairies at their worst. Unfortunately, an amateur botanist, John Macoun, saw them at their best when he visited the area in the 1870s. The triangle, he kept insisting, was “the Garden of the whole country.” His bubbling and misplaced enthusiasm helped convince the CPR to change its route and take the line through the very country that Palliser had condemned.
The truth lay somewhere between Palliser’s sour indictment and Macoun’s rosy vision. The great central plain of North America is never far from desert conditions at any time. A change of two inches of rainfall can cause a crop failure. The wet winds from the Pacific, spilling their moisture on the western slopes of the mountains, sweep hot and dry across the southern prairie. This is really ranching country, but the overflow of immigrants, unable to get better farms farther north, invaded it during the first decade of the century, and broke it with the plough. When the rains dwindled, the light soil was reduced to a fine dust that would eventually blow across the plains in clouds so thick they blackened the sky.
Memories were fickle on the southern prairies. The original settlers, who had exchanged their sod huts for substantial farm houses, tended to remember the early years when the rain was plentiful and crops were good. They dismissed the cycle of drought that had lasted from 1917 to 1921. The rain came back, and for most of the twenties the golden fields brought prosperity. The harvest was so great in 1928 that one hundred million bushels of wheat were still in storage the following year, when the drought returned and the size of the crop was cut by 40 per cent.
Few worried. The pools and the farmers believed that the problem was temporary. Vernon Knowles of the Toronto Mail and Empire, after an 1,800-mile trip through the dry belt in August, played down the drought in a seven-part series of articles that stressed the “buoyant confidence of the farmers.” The paper summed it up in a cheerful lead paragraph: “The writer has drawn a bright picture of acres of Canadian prairie too firmly started on the road to prosperity to be seriously retarded by one poor harvest.”
Clifford Sifton’s Manitoba Free Press Company was too shrewd to believe the Eastern financial community would swallow thi
s hucksterism without the reassurance of the Voice of the West. It took an advertisement in the Montreal Gazette that fall to express its optimism over “prevailing good business conditions.” The ad insisted that “the farmer will not be the stranded, financially pinched and close-fisted figure that has been pictured to us so many times during this trying year.… The crop is in and everybody looks forward to another great year of Western expansion.”
In short, the press proclaimed that the dry season of 1929 was an aberration. Had the Westerners studied the rainfall cycle of the Palliser Triangle that optimism might have been muted. Within two years the dry-belt farmers would be more than stranded and financially pinched. They would be down and out.
3
Crash!
That fall, a kind of smug self-satisfaction had settled over the country. It was fashionable in some circles to look down one’s nose at American mores. This was the year of the St. Valentine’s Day Massacre in Chicago. It couldn’t happen here, people said; Canada would never nurture an Al Capone. As for the vulgar radio programs that were leaking across the border, Canada had an answer to that. The Aird Royal Commission had advocated a nationally owned, un-commercial broadcasting system organized along British lines.
This was the year that the last frontiers were conquered from the air. In 1929 Punch Dickins, the Canadian bush pilot, reached the Arctic in a Fokker Super Universal; Richard Byrd crossed the South Pole in a Ford Tri-motor; the marvellous Graf Zeppelin circled the world – feats that seemed to herald a shining future that every Canadian could enjoy, thanks to the wheat glut in the West and the booming stock market in the East.
The stock market was fuelled by borrowed cash. Shares could be bought from brokers for as little as 10 per cent of their value. Brokers, using the shares as collateral, borrowed the purchase money for their clients in the “call market.” Nobody minded the high interest rates because the value of the stocks was soaring. If the stock went down, however, and the loans were called, the brokers would demand more margin – more cash – from their clients. Otherwise, the shares would have to be sold so that the brokers could raise enough money to cover the debt they had contracted.
In the first two months of the year, the stock profits were astronomical – on paper. In January you could buy a hundred shares of Home Oil for $350 with a down payment of less than $50 and sell them in March for $1,575. You could buy Royalite at $65 and sell it for $200, Okalta at $30 and sell it for more than $300. But hardly anybody sold, because everybody believed stock prices would continue to rise. And for another six months they did.
Only a minority of Canadians plunged into the market, but those who did became obsessed to the point of mania. R.J. Manion, a future leader of the Tory party, who visited the Toronto exchange that year, was shocked “at the strained and anxious expression on the faces of the crowds … as they watched with excited intensity the gyrations of the stock prices.” Manion wondered if everybody wasn’t in some way intoxicated by the gambling spirit in the air, which was “having a thoroughly demoralizing effect upon the masses of the people.” The faces, he noted, were not the habitual poker faces of the professional gamblers but often “worried, frightened … the harassed and tortured expressions of men who are driven by the get-rich-quick passion prevalent in such times.”
It is easy to look back and ask: why didn’t they take their profits out and sell before it was too late? But again, optimism and greed overruled prudence. Why should anybody sell when the supposed experts were urging them to buy? In July, the Financial Post took an informal survey of the country’s leading brokers and investment bankers that “failed to reveal any person who is pronouncedly pessimistic as to the future.” Indeed, how could any of these admit that they doubted the value of the stocks they were busily hustling to the public?
On September 3 two Canadian oil stocks, Imperial and British American, went through the roof to score record highs. The following day the Dow Jones average in New York hit the highest point in its history. Nobody, with the possible exception of the white-goateed Roger Babson, a noted statistician, realized that it had reached an all-time peak. The next day Babson predicted “a stock market crash, which will rival the collapse of the Florida land boom.” Hardly anyone agreed, but Babson was right: the great bull market that had roared on without interruption since 1924 was over.
The first wave of selling began on September 6 and for the rest of the month the market was erratic. Prices dipped, rose, faded, and rallied, but the trend was down. The experts didn’t want to believe Babson. Lionel Edie, a professor of finance at the University of Chicago, was widely quoted when he called the downward trend “a normal adjustment of values,” a phrase he would regret the next day, October 4, when the New York market was hit by a hurricane of selling. The Toronto market followed suit, as it customarily did, recording a paper loss of two hundred millions. On Bay Street, everyone seemed to have a tale of margin holders ruined when they were forced to sell at a loss. One heavy plunger was reported to have dropped two hundred thousand dollars on International Nickel, one of the year’s leading blue chips. Another was wiped out when Yellow Cab plunged from 57 to 21. When he bought the stock, he said, with a sense of injury, he had been told that when he woke up the following morning it would be worth a hundred dollars a share!
Even then, most people were convinced that the bottom had been reached and bargains were waiting to be picked up – a false optimism encouraged by the financial press, which had its own ends to serve. The Toronto Star’s financial service reported the Bay Street belief that “Canadian stocks had been squeezed of the last drop of moisture and were parched now for buying.” A prominent New York broker made headlines the following day, October 5, by announcing that the Canadian mining market would be the bull market of the 1930s. The Financial Post, in an ebullient forecast, reported that “the long term outlook for shareholders in sound Canadian companies remains good.… The outright owner of shares in leading companies … need not worry when stocks sell at below the prices he paid for them, if he has a well diversified list.”
But what was a “sound Canadian company”? How many speculators were “outright owners”? Thousands who had bought on margin owed their brokers for well over half – even as much as 90 per cent – of the cost of the stock they’d bought. And what was “a well diversified list”? The office workers and housewives who could least afford losses had been lured into buying the most volatile shares – the ones that promised quick rewards. These would be the first to be swept away when the panic began.
Most were encouraged to hang on to their shaky investments when the market rallied slightly. By October 17 a modest recovery was under way. But on that day the Toronto exchange reeled under a heavy wave of selling, the worst since October 4. It was repeated on Wall Street on October 21. The following day the market rebounded. This uneasy roller coaster ride should have been a warning to the amateur speculators. For many, however, it came too late. They couldn’t afford to get out and so hung on, victims of the incurable conceit of the twenties. Things could only get better – that was their justification. Hadn’t Irving Fisher, a respected professor of economics at Yale, passed off the new bear market as “a temporary shakedown”? Like his friend and colleague Professor Edie from Chicago, Fisher was unfortunate in his timing. The next day, October 24, would always be known as Black Thursday.
In the first hours of that day, traders who had exhausted their margin began to dump thousands of shares on the market. Prudence gave way to fear and, as prices began to plummet, fear to panic. An unprecedented wave of selling took place everywhere that day. Few who took part in that torrent would ever forget the wall of sound that rose from the exchanges in Montreal, Toronto, New York, Chicago, and Winnipeg. In the Winnipeg Grain Exchange, for six dreadful minutes just after 11 a.m., the babel of noise became so cacophonous that excited traders, lost in the swirl, could not make themselves heard and developed splitting headaches. In those six minutes, wheat plunged from $1.40 to $1.31
a bushel and millions of bushels were dumped on the market.
On Wall Street in New York, the roar of the voices of a thousand brokers, hoarse from shouting, echoed off the high ceiling of the exchange and travelled for blocks. One hundred uniformed police had to be brought in to keep the curiosity seekers from halting traffic. In the visitors’ gallery, seven hundred spectators looked down on the turbulent scene below. Many were in tears; some were actually screaming. Among these glum visitors was Winston Churchill, who was visiting America and was himself wiped out. Shortly after noon when the gallery was closed, they were forced to join the jostling mob outside.
The prices chalked on the big boards couldn’t keep up with the minute-by-minute changes. Brokers toiled blindly, selling, selling, selling to those who thought – often wrongly – that they were picking up bargains. Toronto had no clear idea of the New York situation because the wire services couldn’t handle the volume of trading demands made on them. The radio, which broadcast a continuous recital of stock quotations, albeit tardily, was the only reliable source of information.
All the exchanges established new records that day. In Montreal, where a 25,000-share day was usual, an unprecedented 400,000 shares were traded. That was a trifle compared to New York, where nearly thirteen million shares changed hands in the most terrifying stampede the exchange had ever known.
Yet optimism still prevailed, especially when the heads of the three largest banks in the United States were seen, early that afternoon, hastening, singly, up the steps of the good, grey financial House of Morgan at the corner of Wall and Broad streets, kittycorner from the exchange. Shortly after that, the senior Morgan partner, Thomas W. Lamont, met the press and delivered himself of a cheerful assessment. The problem with the market, he said, was technical rather than fundamental and would “result in betterment.”
The Great Depression Page 3