With its economy so heavily dependent on natural resource extraction, Canada was especially hard hit by the Great Depression that followed the crash of the U.S. stock market in October 1929. Unemployment soared, industrial production collapsed, and prices, especially for farm commodities, fell rapidly as demand for all manner of consumer goods virtually disappeared.
The depression was devastating to Canadian farmers and workers. In western Canada prolonged drought, compounded by years of poor soil conservation techniques, devastated vast areas of farmland in southeastern Alberta, southern Saskatchewan, and southwestern Manitoba. Thousands of farmers abandoned their lands to the drifting soil and moved west to British Columbia, northwest into Alberta’s Peace River region, or into the cities. Governments and private relief agencies were unable to cope with the legions of jobless. King, seemingly oblivious to the scope of the disaster, refused to release federal funds to the provinces to combat unemployment and underwrite relief. Thus, in 1930 King’s Liberal government was swept from office, and the Conservatives, under Richard Bedford Bennett, took power with an absolute majority in the House of Commons.
Bennett faced severe economic and social tests as the depression deepened. His government undertook some modest measures to combat the slump: work camps were set up for unemployed men; federal relief money was channeled to the provinces; the Prairie Farm Rehabilitation Act was passed to alleviate the burden of the severe drought conditions; the Canadian Wheat Board was established to stabilize wheat prices; and various measures were taken to provide foreclosure relief to farmers. In early 1935 Bennett announced a series of sweeping social reform measures, based on President Franklin D. Roosevelt’s policies in the United States, in what was referred to as the Bennett New Deal; however, much of the legislation that was eventually enacted as part of that program was later declared unconstitutional by the courts.
Bennett endeavoured to open foreign markets to Canadian products. He turned first to the Commonwealth, securing at the Imperial Economic Conference of 1932, held in Ottawa, a series of preferential tariffs, known as the Ottawa Agreements, among the Commonwealth countries . When the Ottawa Agreements failed to produce the desired results, he approached the United States to begin negotiations for a reciprocal trade treaty, which was eventually signed in 1935 after Bennett had left office. The new agreement was much less inclusive than the 1854 Reciprocity Treaty.
Paradoxically, during the 1930s mining expanded in northern Ontario and northwestern Quebec, particularly in newly opened goldfields. Revenues in those provinces thus stayed relatively high, enabling the federal government to support the poorer provinces, which faced financial disaster as municipalities turned to the provincial governments for resources to provide welfare and relief.
The depression spawned two new important political parties, the Co-operative Commonwealth Federation (CCF) in 1932 and the Social Credit Party in 1935. The former was a coalition of socialist, farm protest, and labour groups that aimed to revolutionize the economy and society democratically. It espoused a program of large-scale government ownership of primary industries, banking, transportation and communications, and even agricultural land. It also advocated strict child and female labour laws, an extensive social welfare system, and greatly expanded rights for labour unions. The Social Credit Party, founded by William Aberhart of Alberta, advocated paying social dividends to fill the gap between the costs of production and the cost of purchase.
Bennett earned a reputation among voters as hard and unsympathetic. In 1935 he refused to allow communist-led unemployed workers to march from British Columbia to Ottawa, a move that precipitated a major riot in Regina, Saskatchewan, in July 1935 when the “On to Ottawa” demonstrators clashed with police. Labour activism during the depression also included efforts by industrial unions to organize mine workers in the new goldfields and the arrival in 1937 of the American-based Congress of Industrial Organizations (CIO), which helped striking autoworkers at Oshawa, Ontario, to force General Motors to recognize their union.
Popular disaffection with Bennett was widespread by October 1935, when voters gave King’s Liberals a resounding victory. The new government, believing that the way to end the depression was to stimulate international trade, signed the new reciprocity agreement with the United States (it was subsequently modified and renewed in 1938). U.S.-Canadian trade subsequently grew dramatically, but in the short term the depression continued. King’s government reorganized and strengthened the government-owned radio network (renamed the Canadian Broadcasting Corporation), assumed control of the Bank of Canada, and dismantled the work camps, but it undertook no direct action to fight the depression or its immediate consequences.
The Liberal government was deeply concerned with the devastation the economic depression wrought on government finances. In 1936 an official inquiry by the Bank of Canada revealed that the Prairie Provinces were near bankruptcy. A distinguished Royal Commission on Dominion-Provincial Relations worked on a report that amounted to a comprehensive study of the constitutional and financial development of government in Canada and of how the depression had revealed its weaknesses. The federal government, with unlimited power to tax, lacked the power to spend on important matters; the provinces possessed the necessary constitutional power, but, except for Ontario, their financial resources were inadequate. In 1940, on the principle that all provinces should have the means to maintain a minimum level of governmental and social services, the commission recommended the assumption by the federal government of provincial debts, a scheme of federal unemployment insurance, and a reallocation of revenues between the two levels of government. The first two measures were adopted, relieving the debt burden of the provinces and strengthening the federal government, but on the latter there was no agreement, as it would have involved a redistribution of income between wealthier Central Canada and the Maritime and the Prairie Provinces; both Ontario and Quebec were strongly provincialist and resisted redistribution.