Was Economic Growth Likely in Lower Canada?

Author:Geloso, Vincent
 
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  1. Introduction

    One of the most contentious claims in Canadian economic history concerns the existence of an "agricultural crisis" in the early nineteenth century. The term is used with reference to a protracted period of poor economic performance in the predominantly rural economy of Britain's colony in Lower Canada (modern-day Quebec). The literature on the topic has divided itself into two broad camps: the traditionalists and the revisionists.

    The traditionalists emphasize that cultural conservatism retarded innovation in farming practices. This, combined with population growth, poor access to foreign markets, and the depredations of the hessian fly, led to a prolonged crisis in the agricultural sector which, given the sector's importance in the economy, meant a decline in living standards. The revisionists, in contrast, point to positive indicators of growth and a reorganization of the economy away from the production of wheat and toward new products. In general, the revisionists point to modest growth in living standards.

    In this paper, we present evidence in favor of the revisionist position. We argue that, at the very least, growth ought to have been positive. We do so by using three tools.

    The first relates to the literature on free banking. In the late 1810s, Lower Canada's banking sector emerged (Shortt [1900] 1986; Denison 1965) and represented a near, but not absolute, case of pure free banking (Smith 1936). The supply of private banknotes expanded rapidly, far outstripping population growth, while reserve ratios plummeted. The emergence and development of banks in Lower Canada, which would have meant greater access to debt and equity financing for businesses (Levine 1997; Rousseau and Sylla 2005), suggests the presence of positive economic growth. The paper notes that banks issued were not fiat money as we think of them today; rather, they were backed by the commercial loans of the banks that issued them. As such, the increasing supply of private bank notes implies growth in commercial bank lending (i.e., investments) (Lastrapes and Selgin 2012).

    The second tool relates to the theoretical apparatus provided by the equation of exchange (MV = PY). While the banks were increasing the supply of redeemable notes, the price level in Lower Canada was following a downward trend. Under the equation of exchange, unless velocity (V) falls rapidly, a rising (private) money supply (M) and a falling price level (P) imply that there must have been an increase in output (Y). The evolution of M and P in Lower Canada undermine the case that there was negative economic growth.

    The third tool relates to other pieces of evidence (imports per capita, demographic evidence, and urbanization rates) that support the contention of positive economic growth.

    All of these tools point to positive economic growth. We do not try to assert that it was robust growth--merely that the case for negative economic growth is dubious at best.

    In section 2, we briefly review the debate over the "agricultural crisis." In section 3, we highlight the features of the free banking system in Lower Canada and how, in combination with the equation of exchange, it may resolve the longstanding dispute between revisionists and traditionalists. In section 4, we present the evidence regarding macroeconomic developments, imports, mortality rates, and urbanization that supports the revisionist position. Section 5 provides a conclusion and implications for other researchers.

  2. Agricultural Crisis

    In general, Canadian economic history in the early nineteenth century is perceived as disappointing (Buckley 1958). More precisely, Lower Canada (the modern-day, French-speaking province of Quebec) and the Atlantic colonies were considered the laggards (Ouellet 1966, 1972, 1980; Paquet and Wallot 2007; Gwyn 1998) while Upper Canada (modern-day Ontario) was perceived as doing better (McCalla 1985, 1993, 2008; Lewis and Urquhart 1999).

    The attention has mostly centered on Lower Canada (Russell 2012), which the traditionalists argue experienced a "prolonged agricultural crisis" that started around 1800 and lasted until the late 1840s. This thesis has been most notably advanced by Maurice Seguin (1970), Fernand Ouellet (1966, 1972, 1980; Ouellet and Hamelin 1962), John McCallum (1980), and Louise Dechene (1986) and has received some recent cliometric support from Altman (1998). (1) Their core argument is that there was a series of structural problems and exogenous shocks. The underlying structural problems resulted from the poor farming skills of the French-Canadian population of Lower Canada (the majority of the population). Supposedly, they clung to wheat as the main agricultural crop and merely expanded their land holdings instead of adopting new and better production techniques. This "cultural conservatism" was combined with continued population growth (which meant marginally declining returns to land that generated Malthusian pressures), exogenous shocks (the hessian fly, war), (2) and chronic instability of foreign (British) demand for agricultural goods produced in Canada.

    As a result of the combination of these factors, Ouellet and Hamelin (1962, pp. 41-42) speak of declining agricultural output--which, given that 80 percent of the population was involved in agricultural work, meant a clear reduction in living standards. In later work (1966, 1980), Ouellet emphasized that falling prices indicated falling living standards, which for him explained the "decline in rural incomes after 1815" (1980, p. 121). McCallum (1980, pp. 4-5) argued that "reports of malnutrition, hunger and even starvation" confirmed the agricultural crisis (for which the decline of wheat production was sufficient proof) and the return to "subsistence agriculture." This view still holds much sway, as can be observed in schoolbooks and popular history books such as Quebec History for Dummies (Bedard 2013, chap. 7) that still present the agricultural crisis as an era of falling living standards that sets the stage for the political rebellions of the late 1830s.

    This viewpoint has been criticized by many in the broadly defined revisionist camp. While this group is less unified in terms of interpretation than the traditionalists are, its members agree on some points. Most of them reject the idea of cultural conservatism that depicts the French-Canadians as insensitive to markets (Lewis and Mclnnis 1980, 1984; Armstrong 1984a; Courville 1980, 1990, 2008; Paquet and Wallot 2007). They also tend to reject the idea that growth was negative. They either point to slow growth (McInnis 1982) or to a crisis that was confined to the 1830s (Courville 1990, 2008). Like geographer Serge Courville (1980, p. 221), one of the earliest revisionists, they tend to agree that "nothing [...] sustains the existence of an agricultural crisis in Lower Canada" and that there is more evidence in favor of economic growth.

    For example, Geloso and Kufenko (2015) found that the "Malthusian" equilibrium mechanisms often underlined by the traditionalists were absent during the period from 1760 to 1858, which they argue is strong evidence against the contention of negative economic growth. Using estimates of real wealth growth based on probate records, Paquet and Wallot (2007, p. 471) found an uneven but positive pattern of growth from the 1790s to the 1830s (from 18 percent growth on Montreal's north shore to 51 percent growth on Quebec City's south shore). However, the representability of probate records as a measure of economic growth has been heavily questioned (Morin 1981), and much of the remaining revisionist literature has been provided by cliometricians using econometric methods that have been looked down upon by historians who question the quality of the data used (Dechene 1986; Igartua 1985).

  3. Using Free Banking and the Equation of Exchange to Resolve the Dispute

    Although the debate between the traditionalist and revisionist views has been at a standstill, most of the discussion has taken place with scant reference to economic theory even though the debate is basically about economics. Though there are a few exceptions--notably Paquet and Wallot (2007), Altman (1998), and Lewis and Mclnnis (1980; 1984)--this absence has allowed the stalemate to persist.

    Economic theory can be used to rule out certain possibilities in the presence of low-quality data. For example, limited quantitative and qualitative evidence can be used to establish reasonable assumptions regarding constraints faced by actors in any given market, and as such rule out certain possible developments. (3) We can use a similar approach for Lower Canada using the rise of free banking and the equation of exchange to seriously question the possibility of negative economic growth. To understand our theoretical reasoning, it is necessary to explain briefly the monetary history of Lower Canada before 1850.

    Prior to 1815, Lower Canada's money supply was largely composed of various denominations of American, Spanish, Portuguese, Dutch, English, and French (pre- and postrevolutionary) coins (Mclvor 1958; McCullough 1984). Thus, the colony's money supply was largely composed of specie. There were some bills of exchange against merchants (Paquet and Wallot 1983, pp. 475-76), but they had a limited circulation as a result of doubts over redemption. (4) Overall, the money supply prior to that point was more or less constant in per capita terms. While colonists complained frequently of a shortage of money, economic historian Angela Redish (1984) has argued that it was really a scarcity of quality coins and that the "hard" money supply was more or less constant in per capita terms (Chapman 1832, pp. 52-53; unknown 1833, p. 149; Martin 1839; Martin 1834, p. 275). (5)

    However, with the emergence of free banking (and competitive money issue) in Canada, specie began to loss in importance. In 1817, the Bank of Montreal (which still exists today) managed to...

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