At the Depression, the provincial and municipal governments were already in debt after an expansion of infrastructure and education during the 1920s. It thus fell to the federal government to try to improve the economy. When the Depression began Mackenzie King was Prime Minister. He believed that the crisis would pass, refused to provide federal aid to the provinces, and only introduced moderate relief efforts. New Deal
The Bennett Government initially refused to offer large-scale aid or relief to the provinces, much to the anger of provincial premiers, but it eventually gave in and started a Canadian "New Deal" type of relief by 1935. By 1937, the worst of the Depression had passed, but it left its mark on the country's economic landscape. Atlantic Canada was especially hard hit. Newfoundland (an independent dominion at the time) was bankrupt economically and politically and gave up responsible government by reverting to direct British control. World War I veterans built on a history of postwar political activism to play an important role in the expansion of state-sponsored social welfare in Canada. Arguing that their wartime sacrifices had not been properly rewarded, veterans claimed that they were entitled to state protection from poverty and unemployment on the home front. The rhetoric of patriotism, courage, sacrifice, and duty created powerful demands for jobs, relief, and adequate pensions that should, veterans argued, be administered as a right of social citizenship and not a form of charity. At the local, provincial, and national political levels, veterans fought for compensation and recognition for their war service, and made their demands for jobs and social security a central part of emerging social policy.
Blaming it on Bennett: A 1931 political cartoon suggests that Liberals had failed to take responsibility for their own errors. The Liberal Party lost the 1930 election to the Conservative Party, led by R.B. Bennett. Bennett, a successful western businessman, campaigned on high tariffs and large-scale spending. Make-work programs were begun, and welfare and other assistance programs became vastly larger. This led to a large federal deficit, however. Bennett became wary of the budget shortfalls by 1932, and cut back severely on federal spending. This only deepened the depression as government employees were put out of work and public works projects were canceled. One of the greatest burdens on the government was the Canadian National Railway (CNR). The federal government had taken over a number of defunct and bankrupt railways during World War I and the 1920s. The debt the government assumed was over $2 billion, a massive sum at the time, but during the boom years it seemed payable. The Depression turned this debt into a crushing burden. Due to the decrease in trade, the CNR also began to lose substantial amounts of money during the Depression, and had to be further bailed out by the government. With falling support and the depression only getting worse, Bennett attempted to introduce policies based on the New Deal of Franklin Delano Roosevelt in the United States. Bennett thus called for a minimum wage, unemployment insurance, and other such programs. This effort was largely unsuccessful; the provinces challenged the rights of the federal government to manage these programs. The judicial and political failure of Bennett's New Deal legislation shifted the struggle to reconstitute capitalism to the provincial and municipal levels of the state. Attempts to deal with the dislocations of the Great Depression in Ontario focused on the "sweatshop crisis" that came to dominate political and social discourse after 1934. Ontario's 1935 Industrial Standards Act (ISA) was designed to bring workers and employers together under the auspices of the state to establish minimum wages and work standards. The establishment of New Deal style industrial codes was premised on the mobilization of organized capital and organized labour to combat unfair competition, stop the spread of relief-subsidized labour, and halt the predations of sweatshop capitalism. Although the ISA did not bring about extensive economic regulation, it excited considerable interest in the possibility of government intervention. Workers in a diverse range of occupations, from asbestos workers to waitresses, attempted to organize around the possibility of the ISA. The importance of the ISA lies in what it reveals about the nature of welfare, wage labour, the union movement, competitive capitalism, business attitudes toward industrial regulation, and the role of the state in managing the collective affairs of capitalism. The history of the ISA also suggests that "regulatory unionism," as described by Colin Gordon in his work on the American New Deal, may have animated key developments in Canadian social, economic, and labour history. The failure to help the economy led to the federal Conservative's defeat in the 1935 election when the Liberals, still led by Mackenzie King, returned to power. The public at large lost faith in both the Liberal Party of Canada and the Conservative Party of Canada. This caused the rise of a third party: the Cooperative Commonwealth Federation (a socialist party that achieved some success before joining the Canadian Labour Congress in 1961, becoming the New Democratic Party). With the worst of the Depression over. The government implemented some relief programs such as the National Housing Act and National Employment Commission, and it established Trans-Canada Airlines (1937, the predecessor to Air Canada). However, it took until 1939 and the outbreak of war for the Canadian economy to return to 1929 levels.