The Canadian Austerity Program and Its Effect on the American Economy

Abstract

ON SUNDAY, JUNE 24, 1962, John Diefenbaker, Prime Minister of Canada, made a dramatic announcement to the effect that his Government was taking several drastic steps to correct the unfavorable balance of payments which had been making serious inroads in the Canadian economy as well as having the effect of unstabilization of the Canadian dollar in foreign exchanges. The general fiscal situation in Canada had been deteriorating for several reasons, finally reaching the point where a money crisis might have occurred had not these drastic steps been taken. Canada's action is most important and has particular significance for its neighbor to the south, the United States of America, not only because of the effects that might be felt on the economy here but also because of the example it might set for our country which is also feeling the pinch of unfavorable balance of payments. Canada has taken a leaf from the United Kingdom's book of experience, as a year earlier Great Britain took important steps to correct the balance of payments situation. A fiscal crisis can occur quite suddenly and such was the case with the United Kingdom. The Financial Analysts who were delegates to the European Business Conferences in April 1961 may recall the talk given by Sir Roy Harrod, noted British economist. In that year a great wave of optimism generally prevailed among British industrialists, but Sir Roy placed somewhat of a damper on such optimistic hopes for the future. Admitting the year looked promising, he pointed out that a tight money policy to attract foreign capital through high interest rates could slow up the economic growth of the United Kingdom; and that a cheap money policy (which Sir Roy favored) could aggravate the balance of payments problem thus creating a lack of liquidity which might result in a money crisis. Sir Roy's forecasts were amazingly perceptive and many of us were surprised when the economic trend started to turn downward in less than a year due primarily to unfavorable balance of payments and lack of liquidity. In addition, the stability of the pound sterling was seriously threatened. Fourteen months after Sir Roy Harrod's speech, Chancellor of the Exchequer Selwyn Lloyd was forced to launch a largescale program designed to bring a prompt improvement in the balance of payments situation. Among other steps taken, which included a tighter money policy, was the initiation of negotiations for Britain's entry into the Common Market, a step opposed by many factions for political reasons (especially members of the British Commonwealth whose trade positions would be hurt). Such a step had long been advocated by Reginald Maulding, who has just recently been appointed the new Chancellor of the Exchequer.