Industrial Development 1870-1920

The opening of the prairies in the late 1800's greatly increased the stocks of grain available for milling and the industry expanded rapidly, producing flour for export as well as domestic consumption. As economies of scale became attainable, the smaller flour mills in rural locations began to disappear and the industry became increasingly concentrated in large centers such as Montreal and Toronto. Similarly, there were progressive increases in the scale and concentration of enterprises in the metal-working industries. By the beginning of the present century, large-scale iron and steel manufacturing establishments were operating at Hamilton and Sault Ste. Marie in Ontario and at Sydney, Nova Scotia. Their locations were dictated in large part by accessibility to iron ore and coal supplies.

While much of the expansion of manufacturing in the 19th century was based on the technologies of "iron, coal and steam", the turn of the century brought a new technology that was to prove particularly significant for central Canada. Electricity was well-suited to manufacturing processes which required large inputs of motive power rather than heat in their basic operations. The possibility of generating electricity from water power enabled central Canada to overcome its locational disadvantages with respect to the older technologies, notably its lack of local coal supplies. Large new industries based on the processing of raw materials, such as aluminum refining, chemical manufacturing, and pulp and paper developed in Quebec and Ontario as a direct consequence of the large amounts of inexpensive hydro-electric power available there.

Other new technologies developed around the turn of the century helped create new opportunities for "secondary" manufacturing, involving the more elaborate production and assembly of a complex finished product. By far the best example is the automobile industry.

In 1904, only a year after Henry Ford began producing cars in Detroit, a group of Windsor businessmen established the Ford Motor Company of Canada, assembling cars in Windsor from parts manufactured on the other side of the river. Further east, in Oshawa, R.S. McLaughlin converted his wagon-making business to automobiles, installing Buick engines imported from the US in bodies built in Canada. In 1918 McLaughlin became president of the newly-formed General Motors of Canada. 

During the formative years of the industry, auto production in Canada developed under a heavy protective tariff of 35 per cent levied on all types of carriages entering the country. The industry also benefited from the fact that autos made in Canada could be exported to British Commonwealth countries under a preferential tariff arrangement. Although many independent Canadian manufacturing companies began producing automobiles during the industry's early years, none proved robust enough to survive in competition with the subsidiaries of the major US firms. Canadian auto production flourished during World War I and by the early 1920's Canada was second only to the US as a producer of automobiles, although the industry remained almost completely foreign-owned and controlled. Like many other secondary manufacturing industries, the auto industry was heavily concentrated in Ontario.

By the beginning of World War I Canada had begun to develop several important large-scale manufacturing industries, quite different from the small, local operations which characterized the earlier period. By the 1920's most Canadian manufacturing industries had at least one or two large-scale producers and their markets were larger and more widespread. Employment in the expanding industrial sector grew rapidly during the boom period between the turn of the century and World War I and, somewhat more slowly thereafter. 

During this period it seems clear that the Canadian economy was growing slowly relative to that of the United States. There also appears to have been little structural change taking place within the manufacturing sector - for example, the ratio of primary to secondary manufacturing remained stable throughout the period and a list of the most important secondary manufacturing industries compiled in the 1890's would have been much the same as in the 1860's - iron and steel, leather goods, food and beverages, transport and clothing were the leading industries in both decades. Yet some important changes were also taking place. Within industries, the scale of producing units was increasing. Multi-product and multi-plant firms were becoming more numerous, new energy sources (notably hydro-electric power) were becoming available, and the corporate form of business organization was becoming more important. Significant changes were also occurring in the location of manufacturing, with the corridor from Montreal to Hamilton developing at the expense of the Maritimes and other outlying regions. Estimates of the rate of growth in manufacturing indicate that it was on average quite substantial over the period from Confederation to World War I -something in excess of 4 per cent annually. Looking at particular decades, however, reveals that there was considerable variability in this rate: it was low in the 1890's, high in the years 1900 to 1910, and lower again from 1910 to 1914.

The development of Canadian manufacturing in the period before World War I compares favorably with the experience of other countries which were relative late-comers to industrialization. By the time of Confederation, Britain, the US, Germany, and France were well-developed industrial nations. Russia, Sweden, Italy, and Japan, like Canada, were just beginning the process; the relative shift from agriculture to manufacturing was under way in each of them and collectively these countries were beginning to export significant proportions of total world industrial output. Much of this production was in the form of processed raw materials, but by 1914 many of the late-comer countries, including Canada, were also producing and exporting substantial quantities of finished goods. Whether the subsequent path of Canadian industrial evolution was appropriate or not remains a subject of considerable controversy. Supporters of one school of thought deplore the lack of vitality shown in Canada's highly-finished goods sector and the country's continuing heavy reliance in the 20th century on low-level raw material processing. Others contend that this emphasis was economically efficient and desirable.
 
 

The Tariff and the Growth of Manufacturing

During the years immediately following Confederation, Canadian policy-makers focused their attention on trying to restore a reciprocity arrangement with the United States. Failure of these efforts in 1874 and the onset of a severe depression led to strong protectionist sentiment in Canada. The federal election of 1878 was fought on this issue with the Conservative Party vigorously advocating a high tariff policy. Following the Conservative victory, substantial increases were made in what has come to be known as the "National Policy Tariff" of 1879, a regime of protection which subsequent Canadian governments, whether Conservative or Liberal, adhered to tenaciously.

To what extent was the growth of manufacturing in Canada attributable to the protective tariff introduced in 1879 and maintained in one form or another thereafter? While not yet conclusive, the evidence suggests that the answer has to be "not much". A few industries benefited greatly and owed their very existence to the tariff. Others benefited little, if at all, and some were probably harmed. Some producers of primary products such as coal and oil benefited from protection, as did producers of certain consumer goods (such as sugar and cotton textiles) who were having difficulty competing with imports. The fact is, however, that many Canadian manufacturers in the immediate post-Confederation period were less interested in tariff protection than they were in gaining access to US markets through a renewal of some kind of trade agreement. Firms producing farm machinery, woollens, boots and shoes and secondary iron products stood to benefit from freer trade with the US because it would enable them to increase the scale of their operations or because it would give them access to cheaper sources of supply for some of their inputs. Nevertheless, once the protective tariff policy was implemented, nearly all manufacturers clamoured for protection and seized the opportunity to raise their domestic prices accordingly. (Petroleum producers in Ontario, for example, tripled their retail prices as soon as they received tariff protection.) The average rate of duty on imports rose from just over 20 per cent at the time of Confederation to 30 per cent in 1890. The effective rate of protection increased even more.

Because there are obviously winners and losers from a policy of protection for domestic manufacturers it is interesting to consider how such a policy came to be adopted. The political process involved in the Canadian case has been examined by a number of scholars, beginning with W.A. Mackintosh in his Economic Background study for the Royal Commission on Dominion-Provincial Relations in the late 1930's. Mackintosh analyzed the impact of the tariff on different regional interests in Canada, on the allocation of resources in the domestic economy, and on the distribution of income. More recently, economists such as Richard Caves and Gerald Helleiner have used more sophisticated theories of public choice to study the reasons for the political attractiveness of a protective tariff policy in Canada.

Insofar as the tariff increased the rate of growth of textiles and a few other industries which would probably have disappeared without tariff protection in the 19th century, the outcome of the policy may be seen as positive, so long as the immediate burden it imposed on Canadian consumers is ignored. But most of the other industries which expanded after the period of slow growth in the 1880's and early 1890's probably did so mainly because of rising domestic demand associated with the railway boom, prairie settlement, the development of cheap hydro-electric power, and the opening of the new resource frontier in the Canadian Shield, not because of the tariff.

Although the overall effect of the tariff in promoting manufacturing development in Canada remains uncertain, there is little doubt that it encouraged the inflow of foreign direct investment. Despite the generally depressed business conditions prevailing in North America in the 1870's and 1880's, American companies at that time began establishing manufacturing plants in Canada. There were several reasons for this, but one was the effect of the high tariff policy. The tariff increased profits in Canadian manufacturing by making it more difficult for outside producers to compete in the Canadian market. Other contributing influences were the Canadian Patent Acts of 1872 and 1903 which provided that US firms would be given protection for their patents in Canada only if they established Canadian production facilities or licensed Canadian companies to manufacture their products. Provincial and municipal governments in Canada also offered tax and other concessions to induce foreign firms to locate plants within their jurisdictions. At the federal level the Canadian government reintroduced a policy of imperial preference in the late 1890's which gave some US firms (such as Ford) an incentive to produce goods in Canada for export to other countries in the Empire. By the turn of the century there were more than 200 US-owned manufacturing plants operating in Canada.
 

The Industrial Labor Force, Labor Organization, and Social Reform

The transition from a largely rural, agricultural economy to one in which people were crowded into cities and made dependent on wage incomes was not accomplished smoothly. In the process, many individuals failed to cope, either because of age, illness, lack of skills, or simply bad luck. The systems of support which had alleviated such problems in the older, rural settings-the kinds of help which could be provided by family, church, and neighbours-were less likely to be available in the city. Not surprisingly, these circumstances led to demands for "social reform" and helped encourage the development of an organized labour movement in Canada, more active government involvement in the provision of welfare and other social services, and the growth of the cooperative movement and left-wing political parties such as the Co-operative Commonwealth (the CCF) in Saskatchewan.