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'Work and Wages'

Why BC likely won't face another blow like the Great Depression. Last in a series.

By Will McMartin 2 Dec 2008 | TheTyee.ca

Veteran political analyst Will McMartin is a Tyee contributing editor.

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Men do road work at a BC unemployment relief camp during Great Depression.

The most noticeable impact of the Great Depression on B.C.'s finances was a dramatic and prolonged decline in government revenues.

After peaking at $26.1 million in 1929/30, receipts tumbled to $24.3 million in 1930/31, and then slipped to $22.2 million in 1931/32.

They fell even further, to $20.4 million in 1932/33, and finally bottomed out at $20.2 million in 1933/34. It was a four-year slide in revenues, something seen neither before nor since in B.C.'s fiscal history.

It took several years for the Tolmie government to rein-in expenditures. As a consequence, horrific deficits appeared in the province's books -- a record-breaking $4.8 million in 1930/31, and then an eye-popping $7.1 million in 1931/32.

After that, the shortfalls began to shrink -- to $2.8 million in 1932/33 and $374,000 in 1933/34 -- as the Conservatives slashed spending by an incredible 30 per cent in just two years.

Government outlays, which exceeded $29 million in both 1930/31 and 1931/32, dropped to $23.2 million and $20.6 million in 1932/33 and 1933/34 respectively.

The deficits were brought under control, but not entirely eliminated -- the shortfall was $2.8 million in 1932/33, and $374,000 in 1933/34.

A province reliant on resource exports

Why did the B.C. government's revenues fall so dramatically in the Great Depression? The answer is straight-forward: just as it does today, B.C.'s wealth in the late 1920s relied heavily on the export of natural resources. And as the industrialized world after the crash of 1929 fell ever deeper into a severe economic depression, global demand for commodities weakened and prices plunged. The province's exports went into a tailspin.

Consider a few examples. More than three-quarters of all the lumber manufactured in B.C. at the end of the 1920s was destined for the export market. And whereas lumber fetched $20.91 per board foot in 1929, three years later the comparable figure was just $12.65.

An even greater proportion of pulp (89 per cent) was produced for export, and while the volume increased slightly in the early 1930s, its price was cut in half.

Lead and zinc -- of which 81 per cent and 85 per cent respectively were shipped out of the province -- suffered even steeper declines. The former in 1929 sold for $99.98 a ton at smelter, but by 1932 that price had collapsed to just $27.95; for the latter, the comparable prices were $106.04 and $35.90.

It was the same with nearly all commodities produced and exported by the province: salmon, halibut, copper, coal, paper, agricultural goods and more. Across the board, B.C.'s exports dwindled in volume and diminished in price.

It also was true for the wheat grown on the Canadian prairies. In 1929, prairie wheat represented one-third of the value of all Canada's exports, and much of it -- roughly 40 per cent -- was sent westward by rail to B.C.'s ports, from whence it was shipped around the world.

In 1928/29, 99 billion bushels of wheat was exported through the province's ports, but four years later that figure had collapsed to just 34.5 million. And while wheat in 1929 sold for an average price of $1.24 per bushel, by 1932 that figure had plunged to just 54 cents.

Slashing expenditures

As mentioned earlier, the Tolmie Conservatives cut government expenditures by an astounding 30 per cent over the two-year period between 1931/32 and 1933/34. In total, annual outlays fell from a high of $29.2 million, to just $20.6 million.

Much of the credit for that phenomenal achievement went to B.C.'s new finance minister, James William Jones.

Like William C. Shelly, his predecessor at the finance department, Jones was an Ontarian by birth. A merchant, he had settled in Kelowna with his Saskatchewan-born wife, Addie, raised four children and embarked on a career in politics.

He was elected Kelowna's mayor in 1912, and then four years later he won election to the legislative assembly as MLA for South Okanagan. Jones held the seat through the 1920, 1924 and 1928 general elections, and after serving as Speaker, finally was named to cabinet as finance minister on Oct. 31, 1930.

Like many people of his day -- and many people in the present day -- Jones was a devout believer in balanced budgets. "When I took office I insisted on a reduction in the estimates and made up my mind there would be no further deficits," Jones told a large and supportive luncheon banquet in Vancouver in April 1931.

Ratcheting up taxes

Yet the most controversial aspect of Jones' tenure as finance minister was not his radical reduction of Victoria's spending, but his attempts to boost government revenues through tax increases.

The most notable was a Special Revenue Tax, a one per cent "supertax" on personal and business incomes that Jones unveiled in the spring of 1931. A unique feature of the levy was that for working people, it was deducted from their paycheques by their employer and sent to Victoria.

It was the first time in Canada that a "deduction at source" method of tax-collection was undertaken, and it angered both workers (who considered it an invasion of privacy) and employers (who chafed at the extra bookkeeping). Jones soon acquired a unique nick-name, and one not bestowed from fondness -- One-Percent Jimmy.

Public regard for the finance minister worsened in 1932, when he revamped the income tax by introducing a graduated scale that went as high as 19 per cent.

Backlash from business

As B.C.'s finances steadily worsened, the province's business interests grew ever more frantic. They were distressed not merely by Victoria's persistent deficits and mountainous debt, but especially by the government's seeming determination to use tax increases to balance the budget.

In addition to Jones' super income tax, another new impost (actually introduced by Shelly in 1932/33) had been levied on fuel-oil. It generated $543,000 for the provincial treasury in its first full year -- and 90 cents of every dollar was derived from industry.

Business interests had good reason to believe that they paid a disproportionate share of Victoria's revenues. Indeed, an analysis conducted by the government a few years after the Tolmie Conservatives had left office found that industry was responsible for 46 per cent of all provincial tax revenues. Individuals contributed 43 per cent, and "land" provided the remainder.

(Considering just the income tax in B.C., industry generated more than three-quarters of the total during the Great Depression. The comparable figure today for corporations and small businesses in B.C. is about one-fifth.)

In late 1931 and early 1932, representatives of a number of business associations -- including the Vancouver Board of Trade, the Victoria Chamber of Commerce, and the Canadian Manufacturers Association -- held a series of meetings to discuss B.C.'s gloomy fiscal and economic situation.

A plan was hatched to have a group of businessmen volunteer their expertise to examine Victoria's operations, and then offer recommendations as to how the budget could be brought into balance through spending cuts rather than tax hikes. In April, Premier Tolmie finally gave a thumbs-up to the idea, and instructed government officials to cooperate with the review.

Battle over the Kidd Report

The committee, modelled on an earlier, similar endeavour in Britain, was composed of five prominent businessmen. George Kidd, a well-connected accountant and former president of B.C. Electric Co. (B.C. Hydro's private predecessor), was asked to chair the group.

Three months later, the committee's 55-page report was delivered to the government, but the Tolmie Conservatives hesitated to release it to the public. Finally, after taking six weeks to prepare a lengthy addendum that rebutted the report's proposals, the government released the two together.

If the government disliked the Kidd Report, academics at the University of British Columbia were nearly apoplectic. Throughout the fall of 1932, as Kidd appeared at public gatherings to promote his committee's proposals, a number of UBC professors -- Henry Angus, George Weir and others -- led a spirited counter-attack.

Angus garnered headlines when he derided the Kidd Report as "a piece of propaganda," while the committee chair was cheered by his supporters when he said Weir's "economics are rotten, but his manners are worse."

In one of the most-memorable battles, Angus and Kidd met face-to-face on Oct. 15, 1932 in a debate sponsored by the Vancouver Institute. More than one thousand people filled the auditorium to capacity to watch the event.

What was so controversial about the Kidd Report? The first part of the document is an interesting analysis of the province's finances and economic condition 75 years ago, and accurately laid out the long series of fiscal deficits wracked up by successive B.C. governments from Confederation through the 1920s.

But the analysis of B.C. politics, government programs and recommendations for cost-savings set off a firestorm between those in the province who wanted a smaller government and lower taxes, and those who sought an expansion in government services, paid for by higher taxes. (In October 1932, at the height of the controversy, Angus wrote that the income tax "might have to be doubled to balance the budget after all reasonable economies have been made.")

The Kidd panel believed that "the party system" was to blame for the province's fiscal woes, because B.C.'s politics had largely become "a struggle between one party to retain and the other to recapture the benefits of office." A change in administration, the report alleged, was merely a change in the list of patronage beneficiaries.

It therefore proposed that the number of MLAs be reduced to from 48 to 28, because "The greater their number the greater is the danger to the Treasury from selfish local interests and the more fertile is the ground for party intrigue and patronage." Similarly, the 11-member cabinet should be reduced to just five portfolios, plus the premier.

The recommendation that garnered the biggest headlines was the call for a $6 million reduction in Victoria's annual expenditures. (This seems to have been on top of the sizeable cuts already made by the two Tory finance ministers, Shelly and Jones.)

Among the many controversial suggestions as to how that goal might be accomplished: "a very considerable reduction... in the number of government employees" with "a further reduction in their pay"; a 25 per cent cut to teachers' salaries, with a free public education limited only to those children age 14 and younger; and the possible closure of UBC, then the province's sole university.

(Some of the report's proposals today would spark little notice, such as letting Ottawa collect income taxes, and disbanding the B.C. provincial police so that the RCMP could be hired under contract.)

In the end, with the Tolmie government vigorously refusing to accept its recommendations, the Kidd Report was largely ignored, left to gather dust in libraries and the provincial archives.

Crawling out of the wreckage

The nadir of the Great Depression was in 1933; after that, B.C.'s revenues -- especially those derived from the income tax, liquor, motor vehicles, gasoline, fuel-oil and federal transfers -- showed strong upward growth. The province continued to attract newcomers, and an increasing population contributed greatly to economic development.

Provincial spending, cut to the bone or nearly so by Shelly and Jones, grew at a slightly slower pace, and the result was the beginning of a long series of fiscal surpluses that were almost uninterrupted through to the early 1980s.

On Nov. 2, 1933, as B.C. was exiting the worst year of the Great Depression, British Columbians went to the polls. The Conservatives were wiped out. Many incumbents, Shelly for one, refused to seek re-election. Others, such as Tolmie, ran as unionists, while some carried the non-partisan banner, and a few, like Jones, declared themselves to be independents. In the end, just three former Tory MLAs were re-elected.

The new Liberal government was headed by Duff Pattullo, a veteran MLA who espoused an activist role for government and campaigned under the slogan, "Work and Wages." One of his newly-elected caucus colleagues was George Weir, the UBC professor who had battled Kidd; he was named minister of education.

Pattullo believed that an expansion of public works would stimulate economic growth in B.C. One such project initiated by his government was an automobile bridge over the Fraser River between New Westminster and Surrey. Completed in 1937, it still bears his name.

A new party made its appearance in the 1933 general election, the Cooperative Commonwealth Federation (forerunner of today's New Democratic Party). Contemporaries described it as "frankly Socialistic," and with "Humanity First" as its campaign slogan, the party elected enough MLAs to form the official Opposition.

Bigger government won

To a great extent, those in the 1930s who espoused a larger government with higher taxes won the debate not just in B.C., but in much of the industrialized world. For in 1926, before the Great Depression, total government expenditures in Canada -- by all three levels of government: federal, provincial and municipal -- was just 16 per cent of GDP.

Today, largely as a consequence of academics, bureaucrats and politicians adopting the policies of John Maynard Keynes in the post-Second World War period, that figure is 39 per cent. (It reached as high as 53.3 per cent in 1992.)

So long as governments maintain a steady hand on the fiscal (and, at the federal level, monetary) levers, and do not implement either the drastic tax increases or deep spending cuts of the 1930s, it is unlikely that B.C. or Canada ever will again experience an economic downturn as horrific as the Great Depression.

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