The cross of gold: Money and the Canadian business cycle, 1867-1913

306 Pages·1988·14.833 MB·English

by  Georg Rich

THE CROSS OF GOLD
MONEY AND THE CANADIAN
BUSINESS CYCLE
1867 - 1913
This page intentionally left blank
GOLD
Money and the Canadian
Business Cycle, 1867-1913
by Georg Rich
Carleton University Press
Ottawa, Canada
1988
© Carleton University Press Inc. 1988
ISBN 0-88629-082-1 (casebound)
0-88629-080-5 (paperback)
Printed and bound in Canada
Carleton Library Series #153
Canadian Cataloguing in Publication Data
Rich, Georg, 1939-
The cross of gold: money and the Canadian business
cycle, 1867-1913
(The Carleton library; 153)
Bibliography: p.
ISBN 0-88629-082-1 (bound)
ISBN 0-88629-080-5 (pbk.)
1. Money—Canada—History. 2. Canada—Economic
conditions—1867-1918. 3. Gold standard. I. Title.
II. Series.
HC114.R53 1988 332.4'971 C88-090398-8
Distributed by: Oxford University Press Canada,
70 Wynford Drive,
Don Mills, Ontario,
Canada. M3C 1J9
[phone]
Cover Design: Robert Chitty
Acknowledgements
Carleton University Press gratefully acknowledges the support extended to its
publishing programme by the Canada Council and the Ontario Arts Council.
This book is published with the help of a grant from the Social Science Feder-
ation of Canada, using funds provided by the Social Sciences and Humanities
Research Council of Canada.
To Ruth, Daphne and Clemens
THE CARLETON LIBRARY SERIES
A series of original works, new collections, and reprints of source material
relating to Canada, issued under the supervision of the Editorial Board, Carle-
ton Library Series, Carleton University Press Inc., Ottawa, Canada.
GENERAL EDITOR
Michael Gnarowski
ASSOCIATE GENERAL EDITOR
Peter Emberley
EDITORIAL BOARD
Duncan Anderson (Geography)
Bruce Cox (Anthropology)
Peter Emberley (Political Science)
David Gardner (Science)
Deborah Gorham (History)
Michael MacNeil (Law)
T.K. Rymes (Economics)
Daiva Stasiulis (Sociology)
CONTENTS
LIST OF CHARTS 15
LIST OF TABLES 17
PREFACE 21
CHAPTER 1: INTRODUCTION 25
1.1. Aim and Scope of Study 25
1.2. The Structure of the Pre-1914 Canadian Financial System 30
CHAPTER 2: MONEY AS A DESTABILIZING FORCE 37
2.1. Real and Monetary Views of the Canadian Business Cycle 37
2.1.1. Real Channels of Transmission 38
2.1.2. Monetary Channels of Transmission 40
2.2. The Balance of Payments as a Source of Variation in the
Canadian Money Stock 43
2.2.1. Conceptual Problems 43
2.2.2. Viner's Analysis of the Price-Specie-Flow Mechanism... 44
2.2.3. A Critique of Viner's Analysis 46
2.2.4. The Influence of Monetary Policy 51
2.3. Active or Passive Money? 52
2.3.1. Direct Monetary Effects 52
2.3.2. Indirect Monetary Effects 55
2.4. Plan of Study 56
10 THE CROSS OF GOLD
CHAPTER 3: THE SOURCES OF VARIATION IN THE MONEY
STOCK 61
3.1. Cyclical Patterns of the Balance of Payments 61
3.1.1. The Canadian Balance of Payments: General Remarks ... 61
3.1.2. Overall Balance-of-Payments Surplus 64
3.1.3. Current-Account Surplus 65
3.1.4. Residual Inflows 71
3.2. Sources of Variation in the Monetary Base 71
3.2.1. The Significance of Discretionary Monetary Policy 71
3.2.2. The Sources of Cyclical Variation in the Monetary Base 73
3.3. The Relationship between the Money Stock and the Monetary
Base 76
3.3.1. The Cyclical Attributes of the Money Stock 76
3.3.2. The Sources of Variation in the Money Stock 79
3.4. The Relationship between the Money Stock and International
Gold Flows 86
3.4.1. Gold Flows as a Means of Settling Payments Imbalances 87
3.4.2. Cyclical Attributes of Monetary Gold Flows 91
3.5. Summary and Further Comments 95
CHAPTER 4: BANK RESERVE MANAGEMENT AND THE
CANADIAN BUSINESS CYCLE: A THEORETICAL
ANALYSIS 101
4.1. The Monetary Sector of the Model 103
4.1.1. Demand for Base Money 103
4.1.2. Supply of Base Money 105
4.2. The Real Sector of the Model 106
4.2.1. The Goods Markets: Principal Assumptions 106
4.2.2. The Goods Markets: Structural Equations 108
4.2.3. Bond Market 114
4.3. Consistency of the Model with the Stylized Facts 114
4.3.1. Determination of Endogenous Variables 114
4.3.2. Consistency with the Stylized Facts: Short-Run Effects
of Foreign Cyclical Disturbances 120
4.3.3. Consistency with the Stylized Facts: Long-Run Effects
of Foreign Cyclical Disturbances 122
4.4. Summary and Conclusions 126
CHAPTER 5: THE CYCLE-TRANSMISSION PROCESS 129
5.1. The Cyclical Attributes of Canadian Interest Rates and their
Implications for Bank Reserve Behaviour 129
5.1.1. Data Problems 129
5.1.2. Montreal Call-Loan Rate 131
5.1.3. Other Interest Rates 136
11
5.2. Base-Money Demand and Reserve Ratios: Econometric
Estimates 138
5.2.1. Base-Money Demand 138
5.2.2. Reserve Ratios 141
5.3. Bank Reserve Management and the Cycle-Transmission Process 145
5.3.1. The Cycle-Transmission Process: A Simplified Analysis 145
5.3.2. The Cycle-Transmission Process: Implications of Non-
Monetary Capital Flows 146
5.3.3. Consistency of the Model with the Stylized Facts:
Significance of Feed-Back Effects 152
5.4. A Monetary View of the Cycle-Transmission Process: Summary
and Further Comments 153
5.4.1. Summary 153
5.4.2. Further Comments 154
CHAPTER 6: THE CRISIS OF 1907 163
6.1. A Chronicle of the Crisis 164
6.2. Internal and External Causes of the Crisis 165
6.2.1. Internal Causes 165
6.2.2. External Causes 167
6.3. Seasonal Movements in the Canadian Balance of Payments 169
6.3.1. The Seasonal Adjustment Mechanism: The Evidence 169
6.3.2. The Seasonal Adjustment Mechanism: An Interpretation 172
6.4. The Causes of the 1907 Crisis 179
6.5. Summary and Conclusions 183
CHAPTER 7: MONETARY, BUDGETARY AND DEBT
MANAGEMENT POLICIES OF THE DOMINION
GOVERNMENT 187
7.1. Monetary Policy 188
7.1.1. Antecedents 188
7.1.2. Discretionary Monetary Policy and the Constraints of the
Gold Standard 191
7.1.3. Cyclical Movements in the Uncovered Stock: An
Interpretation 194
7.1.4. The Transition to an Automatic System 196
7.2. Impact of the Dominion Government Budget Deficit on the
Balance of Payments and the Monetary Base 202
7.2.1. The Budget Deficit and Borrowing: The Data 202
7.2.2. Cyclical Characteristics of the Budget Deficit and
Foreign Borrowing 208
7.2.3. Significance of Foreign Borrowing as a Source of
Cyclical Variation in the Monetary Base 210
7.3. Summary and Conclusions 210