The links between now and 1958
Jacqueline Thorpe, Financial Post Published: Tuesday, December 09, 2008
In these times of economic 'crisis' it bears keeping in mind how little things change: economies boom and bust all the time.
For example, the last time Canadian interest rates were as low as they are today was in 1958 when Canada was emerging from recession. The economy, valued at about $32-billion at the time, was carried higher by a huge investment boom throughout the mid-1950s. Growth rates reached as high 9% in 1955 and 1956.
Then the boom went bust. The unemployment rate, which was 3.4% in 1956 hit 7.2% in 1961; growth slowed to about 1% as business spending fell off a cliff.
While business was retreating into a shell, consumers and governments led the recovery.
"Encouraged by an amply supply of mortgage funds, expenditures for residential construction reached an all-time high," the Canada Year Book for 1959 says.
The federal government, as it is contemplating today, shifted from a moderate surplus to a large deficit, playing "an important sustaining role in the economy." It raised spending on goods and services and increased transfer payments -- largely on employment insurance and other benefits.
By the middle of 1959 the economy was in full swing with growth expanding at 7% over 1958. Business investment surged. There was trouble brewing between the Bank of Canada and the government however.
While unemployment was still high and inflation low, James Coyne, Governor of the Bank of Canada, spied trouble ahead, especially in excessive spending and current account deficits, and tightened monetary policy.
The strategy was at odds with the government, which eventually tried to fire Mr. Coyne, ostensibly over his pension. He refused, but after the Senate found no misconduct on his part, he eventually resigned over the government's interference.
Now the Bank of Canada is fully independent from the government, so current governor Mark Carney should have no trouble raising rates again -- when he believes the time is right.
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