Retail Asset Management – FinTech History

Innovation in Retail Asset Management: 1960 to 1980

  • Launch of Index Funds (Vanguard – 1975)
  • Acceleration of mutual fund sales in the US first true “star manager” in Peter Lynch / Fidelity.
  • 1980 – $8 billion est
  • 1985 -$15 billion est.
Sold Not Bought: Role of Salesperson Compensation:

Historically: One time commission paid by investors (up to 9%)

1987 – Launch of deferred sales charge and trailers paid out of management fee of 2.5%

Front end commission: 4% upfront plus trailing commission of .5%

Backend compensation: Nothing upfront

but 1% trailing commission

Power of salesperson led to “buying business”. Sales people fueled major change in the way Retail Asset Management started.

Banks start to focus on fund sales via branches

  • Growth of independent advisors – shift away from captive sales organizations (closed to open)
  • Focus on stealing customers from banks
  • Emphasis on US and global funds outside Canada to overcome home market bias
  • First ETFs launched in Canada (TIPs)

Growth in Canadian Mutual Fund Industry (billions)

1980 – $   8  est                1995 – $144

1985 – $ 15 est                  1996 – $211

1990 – $ 25 est                  1997 – $287

1991 – $ 50 est                  1998 – $335

1992 – $ 67                        1999 – $397

1993 – $115                       2000 – $433

1994 – $125                       2001 – $441

  • Interest rates on GICs and bonds
  • Boomer demographic / saving years
  • Scepticism about CPP
  • Market performance
  • Media coverage
  • Banks starting to focus on mutual funds (beginning with money market funds)
  • Industry innovation
  • Strategic Asset Allocation – STAR (Mackenzie funds only) and Keystone (include outside funds)
  • Clone funds to get around the foreign content limit within RRSPs (originally 20%, later increased to 30%, then eliminated)
  • Corporate class funds to allow investors to switch between funds without triggering capital gains
  • Fee structures for HNW and fee based accounts

Growth of Canadian mutual  fund industry assets (billions)

2002        $404                 2010  – $   772

2003        $474                 2011  – $   769

2004        $524                 2012  – $   849

2005        $603                 2013  – $   996

2006        $696                 2014  – $ 1138

2007        $739                 2015  – $ 1232

2008        $585                 2016  –  $1339

2009         $694                2024  –  $2000 (Forecast)

Net sales of Canadian funds

2004      – $12 billion             2011 – $31 billion

2005      – $10 billion             2012 – $36 billion

2006      – $17 billion             2013 – $42 billion

2007      – $22 billion             2014 – $58 billion

2008       ($15 billion)            2015 – $57 billion

2009 – $  5 billion              2016 – $30 billion

2010 – $11 billion             2017 – $19 billion (to July)


1990                     1998                     2011                     2016

Banks                   36%                      29%                      46%                      53%

Independents      35%                      53%                      45%                      39%

Captive / Direct   29%                      18%                      9%                        9%

Loss in Share by Banks was due to:
  • Performance
  • Advice
  • Internal Barriers
  • Level of Focus and Priority
  • Internal Conflict / Cultural Issues
Banks Made Five Key Decisions
  1. Ensured competitive products – shifted to packaged solutions
  2. Approached high value customers with dedicated branch financial planners
  3. Aligned incentives – implemented variable compensation / pay for performance for planners
  4. Deployed sales management for planner salesforce
  5. Incentives to activate branch referrals from front end staff


Growth of Canadian ETF assets (billions)

2002        $   5                    2010      – $    38

2003        $   9                    2011  – $    43

2004        $   9                    2012  – $    56

2005        $ 12                    2013  – $    62

2006        $ 15                    2014  – $    75

2007        $  18                   2015  – $    88

2008        $  19                   2016  – $  114

2009   $  31                        2017 –  $  134 (August)

Threat from ETFs – Sales

ETFs       Mutual Funds  ETF Share of Funds

1999                     .07                 18              0.4%

2010                        3                  11                    27%

2011                        7                  20                   35%

2012                     11                  31                    36%

2013                        5                  42                    12%

2014                     10                  58                    18%

2015                    16                   57                    28%

2016                     16                  30                    53%

Three Types of Innovation

1 Breakthrough

  • Passive investing: Burton Malkiel, Princeton
  • Three factor research: Fama and French, Value, Small Caps and Momentum
  • Junk bonds: Michael Milken
  • Asset allocation: Gary Brinson
  • Stocks for the long run: Jeremy Siegel, Wharton

2 Incremental

  • Income Trusts
  • Income oriented offerings / return on capital
  • Dividend growers vs dividend sustainers
  • Low volatility funds
  • Fundamental indexing / Smart Beta
  • Active share
  • Geographic sectors – Emerging Markets, Frontier, Japan
  • Industry sectors – Technology, Energy, Pharma, Telecom, REITS
  • Tax driven
  • New instruments – Leveraged loans, Floating loans, Bank debt
  • Market sectors – small caps, mid caps
  • Market Responsive
  • Fee structures
  • Tax structures
  • New pricing and features targeted to different segments   

How Futures Work

Practice Excel

Introduction to Futures trading

All right, so I’m really excited about this. This is my Futures Trading tutorials based on my bond trading math tutorials and utilizing Excel and other learning methods. These are powerful ways to learn, and I think you’ll get a lot out of this. We’ll start from simplistic, take it up, ratchet it up incrementally until you’re going to be really well able to understand Futures Trading so let’s get going.

What are Futures?

So, what is a future? Let’s start with that. The textbook definitions are a good waypoint for us, but I do find that academics who are really specialists in the field jump too quickly into technical jargon and detail. And I’m about to basically do that as well, but I want this to be, as I say, like a waypoint or an anchor for us. So that when we go from simple and approachable, following this, you’ll start to build up the knowledge. But it’s good to just know what you don’t know.

So when you turn on your cable news, you might see a ticker tape at the bottom of the screen, and you’ll have some information flowing. Sometimes it’s the e-mini Dow Futures contract or the e-mini NASDAQ futures contract. And you might see something called the gold futures or crude oil futures, and there are prices displayed there. What’s interesting, you’ll note on the day that you’re watching this cable news, is that maybe gold is actually trading at 1350, and maybe the price of a barrel of oil is actually 55 bucks or 60 bucks. So what’s going on here? What are these Futures really telling you? Well, they’re not quite magic numbers. They’re basically a collection of Futures contracts which suggest a future price for the underlying asset. Here, in this case, gold and crude oil. And that’s really helpful for people to understand where they think the price will be in the future.

So, getting back to it, just really understanding. Like, let’s say this is, uh, like I said, 60 bucks and at 65. So, the price of crude oil is going up in the future and in what time frame? Sometimes it’s the September contract, so it’s in the future. Let’s say it’s in July, September contract, so it’s in the future. So fundamentally, it’s about predicting the future and then getting a reward in exchange for correctly guessing with as much information as you can where the prices will be. And the process of doing that actually creates a fundamentally useful market, a price discovery market. And this concept of price discovery is really powerful because it helps people all around the world decide what is the value of the thing they are trying to price.

When we look at a classic definition, the future is a derivative contract to agree on the price of an asset for delivery on a future date. It’s the prompts to buy something in the future with a certain price-determined rate. Now, that’s a word salad mouthful right there. Like, what is a derivatives contract? Well, if you think about cover bands, so a rock band like the Beatles has many bands that will play covers of Beatles songs. But the covers are actually derivative of the original Beatles because they created the original song, for example, right? I was going to go so far as to say that Oasis is a cover band for the Beatles, but that’s going maybe a bit too far. The truth is that derivative really means it’s not the original or the underlying. So the point is the original is the real deal, and the derivative is the slightly removed from said real deal version of that real deal.

In financial terms, we think of derivatives as representatives of the underlying asset. In this case, it’s gold, crude oil, and we’ll show some other examples. So its value is derived from the original asset, actual gold, but it isn’t actual gold. It’s the future value of gold but spotted today. And what I mean by spotted means the now price or the current price. When people say the spot price, they really just mean the now price. So this is, again, the promise to buy something in the future with a certain price determined now. I commit to giving you at a future date this specific amount of cash for this gold.

Historically, Futures were used for commodities, and I’m going to talk about someone way back, historical person Thales. I think his name is Thales of Miletus. I checked the pronunciation of this multiple times. This is really one of the first originators of the concept of Futures contracts, and we’ll get into it, really kind of the fun story. So, what are the classic Futures contracts about? Well, there’s the delivery of bushels of wheat, for example, in September after harvest in the spring. You don’t know how the season is going to go, but you want a guaranteed price in the future for your work.

So, I also provided a table on the right here, so we can see the different types, and we’re going to go into depth on quite a few of these. The livestock, we have the cattle, hogs, and the actual meat, for example. Physical commodities, we’re going to talk about corn, wheat, and lumber, probably touch on all of those. Precious metals, gold, silver, copper. Natural resources such as oil and gas. And then we’ll talk about the financial instruments with special emphasis on fixed income, but equities, interest rates, ETFs, and currencies are also going to be discussed as well.

So, today, we’ve moved beyond these physical commodities and livestock and precious metals and natural resources. We’ve moved into the financialized markets, the equities market, for example. And equity and interest rate Futures have significantly more trading volume than commodity Futures today. And there are quite a few good reasons for that. It’s basically portfolio managers in the financial market trying to, again, support the price discovery process and the valuing of these underlying things.

So, Futures can be physically settled or cash settled. You can imagine getting a thousand bushels of wheat. You can imagine getting, sorry, a thousand barrels of oil. In particular, it’s a classic contract size. You can imagine that now handling that where it gets delivered, that gets complicated. In fact, it’s actually almost easier, we’ve discovered over time, to just cash settle a lot of these, even if it’s a commodity, physical commodities too, instead of giving and delivering a whole ton of a lot of wheat, a specific set of bushels of wheat. You would just agree on the cash settlement.

So the physical commodities, they are kind of generally physically settled, we would say. But there’s a lot to it. There’s the actual storage facility costs, getting the lumber, delivering it, all of that is all part of the process, and we’ll talk about that in depth. But the physical assets are generally cash settled. You can’t physically deliver equity index or Libor, which we’ll talk about, or Cedor in Canada, or Cora as we call it in Canada. Right? SFOR is the successor for Libor, and Cora is the successor calculation for Cedor. You need to actually exchange the cash value difference. So, you have to get the cash value right. You can’t really load up a bunch of Cora onto a truck the way you can load up wheat onto a truck. So, cash settled is the preferred for these financial instruments.

Sides of a Futures trade

Now that we’ve got the textbook definition out of the way, let’s get into a practical example. And we’ll start with the baker, who is, let’s call it the manufacturer of baked goods. And we’re going to keep things super simplistic. We’re going to say this baker makes cakes, and the only supply item that they need is flour to make the cakes. Obviously, there’s fondant, sugar, all those other great ingredients that make a delicious wedding or birthday cake. But in this case, we’re just saying that’s it. Flour is the only thing they need to worry about, and the cake costs a hundred dollars to make, and this flour supply costs seventy dollars.

Now we’re going to ask, okay, what is the gross profit if you’re selling the cake for a hundred dollars and your variable cost for the flour, the variable cost being the cost that would vary over time based on the supply of flour, let’s say it’s seventy. So, what’s your gross profit here? Just I think it’s a hundred minus seventy, right? That’s your gross profit. So every time you sell a hundred dollar cake, you make thirty dollars in profit.

Now, suppose I don’t want to worry about the variable cost of this flour. Let’s say there’s a war in, I don’t know, Europe, for example, or the cost of flour suddenly goes way up. This baker is going to be suddenly worried about the flour. And in fact, it won’t cost, let’s say, seventy bucks. Let’s say the cost of flour actually goes up to a hundred dollars as a result of quote-unquote macro or external global factors. Flour becomes thirty bucks more expensive. Well, suddenly, this baker’s profit goes from thirty bucks down to zero gross profit. And that could be kind of threatening to the business owner’s goals. And in fact, you wouldn’t sleep very well in that case.

So, this baker has all these worries about creating and capturing market share, making sure that they have a reliable source of clients, customers that keep coming back. They make great baked goods. And now you’re also, as the baker, worried about the price of a commodity that you need to make all these baked goods. It kind of would stress you out quite a bit.

So, introducing a solution for that problem. Imagine you could lock in the price for the flour. So, the manufacturer finds someone who can supply the flour, but on a special agreement. The producer of the flour will come to an agreement through a contract that states and stipulates that they will provide the flour for seventy bucks in a year’s time when you need to replenish your stock of flour or whatever the time frame. Seventy bucks will be the static price. I agree to give flour in exchange, you give me seventy bucks, and we’ll be even Stevens on this. This will be a locked-in price and this is known as the technical term is known as the Forward Price.

Now, I think we made it pretty clear why the baker would like to do this, right? $70. Now it could go up to a hundred dollars, and there’d be zero gross profit. At the same time, though, the producer might be betting something else, that the $70 bag of flour actually might go down to $40. So, if that were the case, this manufacturer is still contractually obligated to buy the flour at seventy dollars, and the producer is still contractually obligated to supply the flour at that price. Even though in the case I just mentioned here, and we’ll show it graphically in a bit, if it was $40, this baker would like to get out of that deal. “Wow, no, I don’t want to continue that deal.” But this futures contract obligates the manufacturer to legally require them to follow through on the contract. So, it’s a kind of a beautiful system because it locks in certainty.

So now we want to touch on, okay, what’s actually the terminology here? We start to get into jargon a little bit, and I think it confuses people. But the producer would be said to be short the future. So, this “short the future” person is saying short is another way of saying “I want to sell it because I expect the price to go down.” I’m shorting the future on trading floors or in finance generally. If someone says they’re short a stock or they’re short a bond, that means they’re not bullish about it. That means they don’t think the value of that asset is going to be going up. They think it’s going down. So, they’re incented to sell the asset now because they would be shorted if they had the asset right now. They would sell the asset. If someone says the opposite, if they say, “Oh, I’m long this asset,” that means they’re holding on to it and they like the asset because it’s going up in value over time, in their estimation. So, if I say I’m short a particular stock, it means I’m selling that stock if I have any of it. And if I say I’m long a given stock, it means I’m holding on to that. Exactly the same logic applies for the bond market and fixed income as well.

And so, back to this particular example, the producer has sold the futures contract. They have to deliver the flour that’s part of the contract, and they lock in the price for sale. And this benefits if the price declines after locking in that price. The futures contract is agreed to because if the price went down, as I said, from 70 to 40, this would be a great profit situation. Gross profit situation. That’d be sixty dollars, right? If it was $40 worth of flour. But sorry, Baker, you agreed to take on this flour for certain in exchange for $70. You would get your bag of flour.

When someone said to be long the future, that’s what we’ve got with our Baker friend here. The Baker bought the future contract. They received the flour and they locked in the price for purchase. And I give seventy dollars in a year’s time in this arbitrary example. And it benefits specifically if the price increases after locking in the price by having gone long the future. And the producer is unhappy, really, because they were betting that the price was going to go down. That’s why they entered into this contract. They went short the future.

Now it is as good a time as any to pause this video. I’m not in this exact frame because obviously I have these two pause symbols on it, but pause the video and explain this whole thing to yourself. Or if you have a friend or family member in the room who’s willing to entertain listening to you explain it, explain what I just explained. And this is actually something really cool. It’s called the Define men technique. Professor Feynman, Nobel Prize-winning physicist, amazing lecturer. You learn a lot in his view by pretending you are teaching a concept to a group of students. It is actually the best way to learn, in his opinion, and I tend to agree. You end up identifying gaps in your own explanation, and you go back to the source material to better understand it. And you organize and simplify, and then transmit it to others. You know, the ideas. And it wires in your brain and understanding, and you’ll be able to better move forward because you now understand it a lot better. So let’s get into the philosophical side now.

Farmers, Producers, Manufacturers and Consumers

So what’s really happening here from a human behavioral level? As I’ve explained before, not in this series but elsewhere, that the time value of money, the value of money today is always greater than at any point in the future. Human behavior says it’s always better to have something now than at a future date. At least, that’s the financial system’s bias assumption that we prefer things now over distant into the future. Futures contracts themselves actually address this other concept of worrying and having enough sleep at night and stress. But what is that term that we typically use for it? We call it risk. We’re managing risk by basically saying, “I’m locking in cost certainty for the production of my goods and services, and the producer is locking in fee certainty that they’re going to be paid.” In this example, 70 bucks in exchange for their product, which is ground-up wheat turned into flour that they deliver to the baker. And that is even Steven’s arrangement that they both contractually agree to. It’s binding. You can’t get out of it. So it creates a system of certainty in a world of uncertainty.

So futures really have an incredibly valuable role in the financial market and in this real-world example. And I’ll explain how this is much more a real-world example than an actual Financial Futures example, but this is a good starting point. And I hope this is locking in your mind as to what’s actually going on, what are the mechanics, and some of the general terms I think we’ve covered here. Basically, this baker is hedging the costs with price certainty around this particular commodity that they need to make awesome, delicious wedding cakes, whatever cakes they do.

So wait a second, what are they? Actually, hedging against what are they avoiding? What are they worried about? What are the risks that they’re taking?

Into account and why they’re entering into this contract? Because they’re worried about it going up to a hundred dollars, particularly in the original example where let’s say there is a global war. Around wheat prices go up to 100 bucks, so suddenly zero gross profit. This is a great deal. The baker then looks “quite smart.” This would be horrible for society in general. I’d be worried about people even having weddings and birthdays or celebrating with cake. Anyway, but one of the side effects would be the price goes up.

So the baker in that circumstance would have at least one thing to be happy about. Now they don’t have to have huge cataclysmic macro events for the price to go up dramatically like that, by the way, but that’s sort of the inherent reality in finance about risk-taking. That if things go bad, you can actually generate a benefit for yourself. If things go well, you can also generate a benefit for yourself. That’s one of the powers of this technology, this financial technology that’s been developed, which is to, as maybe the word, take advantage of a given circumstance to support one’s interests using your predictive powers.

So now, just using the same example but showing it in a different visual style, we’ve got the producer again. They’ve got the flower, they produce flour. The baker has cash, they produce baked goods. They’re going to come into a contract together at seventy dollars. The producer is going to give the flower or the baker. The baker’s gonna give the money to the producer at a future date, right? And so, how do we illustrate that future date? Anytime into the future could be a week, could be a month. It could be often contracts will find are quarterly or a year. But what happens in the interim? Right, the price of that bag of flour might actually fluctuate.

So in scenario one, initially the flower’s price goes down a little bit. So the producer is really happy that that is happening because maybe it’s going to continue to go down and they can provide the flower and get 70 bucks at this point in the future. Right, it’s a pretty sweet deal if that were the case. But in scenario one, look what’s happening. Oh no, oh no, now the producer is not so happy. The price of flour has gone way up to a hundred dollars. So just pause, I’ve kind of already implied what happens here, but think about what exactly, who’s happy, who’s the winner and loser in the scenario? This person who’s short the future or the person who’s long the future. So just pause for a second and think about it.

So in this scenario one, the producer is definitely going to be unhappy with the situation. Now, why would that be? Well, because they have to deliver that flower at seventy dollars value, and they get seventy dollars from the baker when flour in the open market is actually worth a hundred dollars. So the mark to Market, which we’ll talk about what the global or local or commodity price of flour in the general market is, a hundred dollars, and yet you’re only going to get seventy dollars for the flour you’ve delivered to the baker in this circumstance. You’re not happy about that. Now, the Baker, on the other hand, who was long the contract is, in fact, quite happy, right? Because all they had to do is pay 70 rather than a hundred dollars for that bag of flour.

So now let’s consider a scenario. Scenario two: the available wheat fields double or there’s a huge amount of surplus wheat in circulation. And then there’s also the flour production. They have found new efficiencies in technology, and over the last year, they’ve made it a lot easier to convert wheat to flour. Whatever the macro or whatever activities are happening, or maybe there’s been a huge decline in the number of people who like to bake cakes (I highly doubt that, but let’s just say that were the case), then the price of flour goes down. More realistically, there’s a bumper crop, and more wheat is being produced. So there’s more supply of the commodity in the overall global market, and maybe that’s because the weather has been fantastic. It’s rained at the perfect time, the seeds were sown at the correct time, at the optimal time to produce the highest yield of wheat per bushel. All that stuff is contributing to an increased supply of this commodity, and therefore, the price of flour has dropped dramatically. That would be an example. This is also the technical term, might be a bumper crop. There’s more delivery of wheat. I’m from Saskatchewan, so you would know, growing up there, that it was always if the weather was cooperating, then it’d be a great year for the broader community, the economy itself.

So, I’ll just pause for a sec. You can pause the video and ask, “Who’s the winner and loser in this circumstance?” The person who’s long the future or the person who’s short the future, right? So the person who’s long the future is unhappy, and that’s the baker, of course. The person who’s long, this person is now getting flour. They have to pay $70 for the flour. The producer is delivering that flour, and in the open market, it’s worth $40 bucks, whereas they’re getting $70 from the baker in this contract. So, in that circumstance, the person who’s short is going to be the happier one, the one who won in this bet, in effect, or this strategic decision around locking in the price a year in the past. And now, here’s the fruits of your decision. You’re actually really making a great deal for yourself as the person who is short. Maybe you thought you knew all along that there were factors that were going to lead to the price really dropping, right? You had some insights that you felt a few people were aware of, and you wanted, and it’s not insider trading, by the way. I mean, you had insights that were divine, or you think you’re really brilliant and you have these predictive powers, and this bore out in this case.

So now we’ve talked about definitely the producer and manufacturers and their relationship. We haven’t talked about the relationship with the farmer who has the wheat and harvests it at the end of a season. The farmer is actually a really important group to understand too. They have a particular problem when the whole crop is harvested all at once. All the farmers, all at the same time, are harvesting. So suddenly there’s a huge supply of wheat in the market. If you look at it from a simplistic economics demand-supply curve perspective, you would know that that would drive down the price of wheat in the market. We’re going to see this in other examples, including in ancient times relating to olive oil. The price might be appealing for the manufacturer just around September or October, but it doesn’t have to hold all of that wheat all at once either. And in fact, it’s actually a lot easier, depending on who wants to store it, to keep the wheat in a certain location and have these contracts correspondingly obligations tied down to when they get the delivery of that wheat. And so, you can actually, and the great thing about wheat too is it can be stored all year round, so you can time when you actually have to deliver it. So, this demand-supply concern about all the wheat at the end of the season isn’t so big, but they want to hedge their risk if the price goes down. Wheat farmers always are incented to have the highest price for their commodity, and the manufacturer or producer at the flour mill has an incentive to buy it at the lowest price possible. So, this is a counterbalancing risk management tool as well because the price is balanced based on these futures contracts that create a new equilibrium for the value of the underline. So, as it’s hedging of prices and managing the risk, there’s another group of people we talked about, the farmers. We talked about the producer and then the manufacturers. Let’s talk about the consumer because they’re actually very important as well, obviously.

With the baker, you had the wedding cake. Well, that’s actually for obviously weddings, and the price of the cake we said was a hundred bucks. Well, if that price went up too high, they might be disincented from buying a wedding cake or getting another wedding cake, for example. Or the better example I think is looking at cereal. It’s a stable price across the year. Usually, General Mills will calculate out with their financial department, their variable costs, their fixed costs, how much is it going to cost to put this on a shelf, what the competitors are doing for their pricing. All of those factors are consumer-facing issues around what the appropriate price for this cereal is. And that price has to be stable over a longer period of time. And that’s way longer than the real-time adjustments to the price and the of a commodity like wheat, which is used in making Cheerios. So, futures contracts are really essential for then stabilizing what General Mills interests are, hedging the supply costs to deliver to the consumer a nice even keel price over an extended period of time because that’s what consumers demand. Consumers don’t even, you know, inflation is two percent, is happy. But if we see higher inflation, then the consumer is unhappy. And so, all these are factors, and the futures market delivers for that.

Finally, you know, another example would be that livestock market, again securing the prices for cattle. And you go to a fancy restaurant, and the price of a steak is relatively stable over a year, for example. What happens over time? Obviously, inflation, but two percent inflation roughly is kind of the goal. But in effect, the steak is at a reasonable price over a stable price over a longer period than what the financial and supply prices can muster. The supply prices can fluctuate very rapidly, and it’s in real-time over a period of an extended period of time. So, futures contracts act as a stabilizer for the pricing when it’s consumer-facing. So hopefully this way of looking at it is also helpful as a visual format. So, the previous slide and this one together, I’m hoping you locked in this knowledge. And might as well say it again, explain this to a friend or family member, and you’re going to feel really good and you’ll be ahead of the game.

Futures run deep in human history

Alright, so now let’s take a look at some clay tablets. This is a clay tablet from Mesopotamia, which is between the Euphrates and Tigris River, which is actually modern-day Iraq. Ancient civilization, and what they were doing here is quite remarkable. I called it technology earlier, and when we think technology, we think computers, all that stuff. Now, financial technology like this has been around for over 5,000 years. This tablet stipulates a forward contract, and that is the precursor to futures contracts. Farmers can agree to sell their crop in the spring to be sold in the fall at a set price. The farmer is protected by any uncertainty in terms of the outcome of the price, but the other side of the transaction could be harmed or benefiting depending on how that season goes. So, this is exactly what we just talked about in the previous section. This was exact and this was happening 5,000 years before any of us were around. And so, let’s also just reconnect to why it’s called a derivatives contract. It’s because you’re transacting cash in exchange for the underlying, or you’re basically making a speculative position.

You’re setting up a price for a commodity, and you’re using the real market price of that commodity at the end of the period to determine how much you won or lost by in terms of your committed bet at the start of the contract. These farmers would have these clay tablets to lock in the sale of their crop in the spring for that coming fall at a set price, regardless of how the market price for that crop changed between the spring and the fall. Right, they’re locked in. They have to pay the specific price they agreed to. Now I’m definitely not going to ask you to pause the video now and use this slide to explain futures because I don’t really get what this is, but archaeologists please say that this is all accounting to help describe the contract that the farmer and whoever was the counterparty agreed to in this contract. So, it’s kind of neat. So, one of the subconscious insights of all this is if people 5,000 years ago were doing futures contracts, then we should be able to figure out how these things work as well.

Thales of Miletus

Continuing on in a sort of historical pathway here, this is a painting in the Vatican. It’s called the School of Athens. In the middle of this painting is Aristotle, and in fact, he is on a ton of textbooks. If you ever take philosophy, you’ll have seen this depiction before, and it’s showing sort of a court of all these famous philosophers are in here. And one less famous philosopher is named Thales of Miletus, and that is this dude here. We believe he was a generally poor philosopher to start. He wasn’t very successful in being a philosopher, it turned out. But he used another skill, and it was the skill of forecasting and predicting. This he was able to predict all of the harvest and get a good sense of weather patterns. And he had a fine-tuned means of understanding when would be an exceptionally good autumn for the olive harvest. So, Thales, as a result, made agreements with the local olive press owners. Okay, so what’s this thing on the right? It is an olive press. If you actually think about it for a few seconds, you’ll get it pretty quickly. You put the olives right here, and this stone rolls over the olives, crushes them, and then the olive oil comes out down here. And obviously, you kind of go in a circle. So, this is an olive press. Point here though is that Thales went to each one of these, probably fairly expensive to build local olive press owner companies, I guess you could call them. And he made agreements with them to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. He basically blocked off their calendar and said, “Hey, I want to own the rights to this olive press during the autumn season.” Thales successfully negotiated lower prices because the harvest was in the future, and no one knew what the harvest would be like, whether it be good or bad that fall/autumn. And because the olive press owners were willing to hedge against the possibility of a poor yield, they entered into these agreements with Thales. And when the harvest time came and the harvest was good, many presses were wanted concurrently. Right, everyone’s like, “Alright, we got surplus, we got a bumper crop of olives, we gotta get them pressed quickly or else they’re gonna go bad.” And so, there was a huge demand for these olive presses all at once, and Thales was like, cross his arms and was like, “I’m pretty smart now, aren’t I?” He provided access to these presses, but at a very high rental rate to the olive producers. And he made an amazing amount of money in that era. I guess a drachma, probably a Greek drachma. Made a lot of money as a result of cornering the olive market, doing a futures contract with the olive press owners, and finding out a little niche, little spot, and to become incredibly wealthy. Not a great philosopher, but a great business person, you might say.

Dojima Rice Exchange

Now I promise to get onto a topic that seems a little more relevant to modern-day. But the first futures exchange market was the Dojima Rice Exchange in Japan, which was initiated in the 1690s. Originally, it was about landowners who were involved in farming and selling their rice. Farmers made money by selling warehouse receipts for the rice and transferred excess supplies of rice to Osaka and Edo merchants who bought these receipts would lend money to farmers in need in return for future rice crops. So, they started to create a kind of financial system in that way. But what really kicked things off was in 1730, futures trading started at the Dojima market with the goal of preventing long-term declines in rice prices. This allowed farmers to hedge against price changes between harvests. They wanted a guaranteed price. And so, you can see that what I’m about to describe is intuitively you should say, “Okay, this is a futures contract.” Dojima rice futures markets operated on all the same modern rules of futures trading. So, they had a fixed volume for each contract, they had clear deadlines for each contract’s expiry, and there were specific contracts. The spring contract was from January to April. There was the summer contract from May to October. And then there was a winter rice contract from October to December. And these were set tranches where those contracts existed. So, all these transactions were also entered into a book registration system, and that listed also the names of the parties, the rice volume of the futures price as well, and the delivery dates were all recorded. And here’s the key: transactions were actually settled in cash without the need to physically deliver rice between the two counterparties at the end of this trading period. And so, this was how the rice contracts really took off and futures trading really took off from Dojima.

Another really interesting thing is that samurai were paid in rice, and after a series of bad harvests, samurai realized they needed to be paid in something that was stable for conversion. And so, these futures contracts acted as a convertible to coin points as well, and they created a broader market in that sense. Then samurai, by the way, I was a big fan of Teenage Mutant Ninja Turtles, so that’s probably why I’m mentioning this. Academic textbooks also mention this, but samurais were hereditary military nobility. It was a medieval and early modern Japan from the 12th century to their abolition in the 19th century. And they were basically well-paid protection teams or warriors. And anyway, so that was just a side note. I thought it would be fun to talk about samurai for a sec.

Chicago Board of Trade

Something further on happened, and it happened in Chicago, United States, where the concepts around the Dojima Rice Exchange were brought, imported into the U.S. and used a lot of ideas from Japan were exported. And one of them was indeed futures trading, in my view. And the Chicago Board of Trade was established in 1864, and it was all centered around futures contracts. And these contracts were based on grain and livestock. It started a trend that saw these contracts created for a number of different commodities, from livestock in particular, and particularly wheat as well. And a number of futures exchanges were set up in countries around the world. This was the first one, the Chicago Board of Trade. I mentioned this now. You can actually see in this architecture there’s this guy holding some wheat, and this person holding some corn. And you can bet that corn and wheat futures contracts were indeed traded at this CBoT. It’s Chicago Board of Trade, is how it’s probably referenced. I don’t hear a lot of people saying CBoT. All in all, there’s a long historical trend that goes all the way back to, well, the Mesopotamian, all the way back 5,000 years, Thales of Miletus, to the 19th century in Chicago. And we’ll see what are the mechanics. Now, let’s dive a little deeper into a more complex example of futures trading and see if we can better understand this concept.

Alright, so now we’re going to talk about another example, this time, it’s a futures contract related to a precious metal, and that metal is gold, right? So, Trader A has a hypothesis, and that hypothesis is the following: that the economy, in this example, is going to be entering a recession. And when there’s a recession, there’s going to be also a flight to safety. And that means people will take their capital out of the equity market instead of these speculative stocks that they’ve got. They want to move their money from those stocks, convert it into gold because precious metal gold is a place that can be relatively safe against major shocks in the broader economy, etc. So, the thesis is gold is going to be vogue. It’s going to go up in value.

Gold Example, Futures trades

So, Trader A has that bias, and just to ratchet it up a bit and sort of suggest there’s more to learn in terms of how bonds, GDP, and economics all intertwine, I’ve got this visualization. If you look in the description of this course, you’ll be able to find my other courses on bond math, and we touch on the bond yield system in greater depth. But here, I want to just talk about what exactly is going on with this Trader A’s hypothesis.

So, Trader A basically thinks the business cycle is right here, approaching a new recession. And he or she notes that the bond market and the yield curve is showing signs of a butterfly shift, which is indicative of a recession. And that is where the short-term yields on bonds, the three-month bond and the six-month and one year, are really bowing downwards, they’re pushing down, shifting downwards, and longer-term yields are slightly lower. And so, you’ve basically got from an inverted yield curve situation, which is this phase three where there’s basically an overheated economy, the yield curve will start to invert in that circumstance. Now you’ve got a butterfly shift. We think there’s a recession happening. The bond market’s going to behave this way. The flight to safety in this Trader A’s view is people are going to start taking capital even out of fixed income and put it into gold.

And maybe, you know what? I’m just going to keep going here because I think this is so cool, right? So, you’ve got your yield curve. So, in a growing economy, there’s a natural shape of the yield curve. It’s upward sloping. And then, as expansion starts to happen in the broader economy, you start to see different behaviors. People start shifting their investment into the longer-dated bonds because they think it’s a safer plot space. And what happens here is when yields go down, prices go up. And when prices for bonds go up, that’s indicative of demand for those bonds has gone up, right? Because if you think of demand, if people increase demand for something, the price correspondingly goes up. And here, the yields have correspondingly started to shift downward. And then, you start to really see an inverted yield curve. So, the entire macro bond market, institutional specialists, etc., are all sort of coming to a consensus, in effect, although there are competing views. And there’s but the actual way that people spend their capital, allocate their capital is indicative of what they think. And so, that’s why the bond yield curve is such a powerful tool for people to understand how the broader economy is doing, particularly the difference between the three-month and the ten-year in the US, is the biggest, most widely used metric. So, you see an inverted yield curve when the three months yield is actually higher than the 10-year yield.

And then, we got this butterfly story, right? What would you say? I said this is a recession, and a recession is happening for sure-ish. And then, in the deep recession, the yields are driven down by a central bank dropping the interest rates or policy interest rate in Canada or the FED fund rate in the US, pushing it down. And other countries have their own term, but it’s basically the central bank’s interest rate pushes that down. And then, you start to have a normalizing yield curve as a result from going from the butterfly-shaped, which is right here, down to a return to a sort of normal-ish, and then back to the bottom of the trough, which is really one. I guess you could put the one here, and then recovery here, and then peak up there.

So, that was a bit of a tangent, but back to what Trader A wanted. Why is the Trader A person so bullish on gold? Bullish meaning they think the price is going to go up. Well, let’s think about it from a demand-supply way of thinking. So, this is a price and quantity relationship here, and bonds, in particular, or gold stocks, all behave under the same rubric of this demand-supply curve. Finance being a sub-discipline of economics, it makes a lot of sense that this is useful. So, what happens here is that this Trader A thinks that with regards to gold, the price is at $1,200, and that’s the current demand. The thesis is because there’s a recession, people are going to increase their demand for this precious metal, pushing the demand curve this way, pushing it this way. Supply is relatively static in gold, and so as a result, the demand curve pushes this way, pushing the price up. And that’s really the reason this Trader A thinks, “Okay, I should buy positions along on the gold future.”

So, let’s say the spot price per ounce is at $1,200. And that’s per ounce. Then, we’ll go into a forward price agreement with Trader B. Trader B says that there is a carrying cost of $50 bucks per ounce, and there’s a contract for 100 ounces. That’s the futures contract preset requirement that you have to take 100 ounces of gold. Remember, this is per ounce. So, Trader A wants gold for this set price here, commitment for this nice price, which is a good price for them. Trader B says they want the forward price that is agreeable in the marketplace, times 100 ounces. And that’s $125,000 for the delivery of this gold, which again Trader A wants to take his or her cash and turn it into physical gold because Trader A is thinking that at $1,200, they will get the equivalent of $1,300 worth of gold at a future date, right? Because the market price, this trader is anticipating, will go up. So, the value of this commodity will go to $1,300. But the spot price that they have to give to Trader B is actually only the forward price that was agreed to in this futures contract. It stipulates that the forward price is $1,250 per ounce.

Certainty of Winners & Losers in Futures

So, Trader B is going to, at this upgrade upon date, receive $125,000 in exchange for 100 ounces of gold that the trader then takes. And again, if this is $1,300 in value, the actual gold goes up in value, then Trader A has made a nice profit. Now, in this modern context, I can see how this might be a little confusing because wouldn’t it make sense then actually for Trader B to just ship away a little bit of the gold, take away an equivalent ounce or so in order to deliver the exact amount that Trader A is getting in terms of a swap from cash to gold? And no, that doesn’t make sense in this futures contract land. This is the whole point of the futures contract, as we’ve talked about it way back from Mesopotamia to the Dojima Rice Exchange, all of that. I think now, hopefully, you get that this is a bet on where the price of this commodity is going to be. And Trader A wants the certainty of a predetermined price or a predetermined amount of cash, giving cash for the asset when the asset has gone up in value. Trader A is going to be really happy. If the asset has gone down in value, Trader B, plus shorting, is going to be happy.

And so, here I just want to touch on the concept of that carrying cost. Higher future prices, a higher future price, in the prior example with the baker, the $70 bag of flour, there was the future price was $70 as well for simplicity. Now, we’re just sort of adding a little more complexity. This is that carrying cost, and that carrying cost here is that $50 extra that was negotiated as part of the forward price. So, what does this additional $50 really account for? Well, things like inflation. The contract might be a year long. In a year’s time, inflation, in a normal stabilized period, would be 2%. That’s the actual target inflation that monetary policy, global central banks have. There’s also the risk-free rate of return. I could put this capital elsewhere, and I would get a return that would be similar to $50. So, you need to pay me for this risk-free rate. And then, the cost and income received for holding the asset. So, this is the more formal convenience yield component, right? So, it’s the implied cost, and we’ll be using that word “implied” a lot. It’s the implied cost of holding a physical commodity, such as livestock, or even a financial commodity like a bond, instead of actually holding the corresponding futures contract.

It’s the underlying that you are in possession of, and it is this extra return one can earn from holding the physical commodity instead of the futures contract. So for livestocks, futures differs from bond futures in that the underlying asset is obviously a physical commodity, whereas bond futures are based on a financial instrument. And this means that in the case of livestock, the physical animal must be delivered upon expiry or expiration of the futures contract, whereas the bond futures typically settle in cash. And in this example of gold, we’re saying that it would be settled in the physical gold, but we’ll show later that it can also be settled by cash. But basically, in both, in all these examples, the convenience yield is an expression, and it’s associated with things that are more difficult to hold on to. Like, as you can imagine, you’ve got to feed the livestock, the cows have to have be sheltered, etc. So it’s typically a lower convenience yield to manage livestock than that of bond futures.

So another way to express this is to say that the convenience yield is basically saying typically forward prices are less than the spot price, typically for beneficial assets such as financial instruments like bonds, and forward prices are typically greater than the spot price for burdensome or costly to hold assets such as livestock and, in this case, gold. Because let’s face it, gold is pretty and all, and if you leave it out in the sun, apparently it will melt a little bit if it’s pure gold, and it costs to store, and you’d probably need to get a vault for it. I think you probably need to get security for it. All that’s sort of a pain in the behind, I guess you might say. And so how do you quantify that? Well, you have the carrying cost minus the convenience yield that the holder of this commodity gets 50 additional dollars to justify entering into this contract, sweeten the deal, and make this futures contract a reality.

Novation, Cancelling-Out

Right, so let’s ratchet up the intensity here. We’ve got Trader A and Trader B, again. Trader A wants cash, Trader B has gold, and there’s a futures contract at stake here that they want to agree to. So let’s just say in this example, as we showed in the prior slide, that convenience yield, the 50 bucks, is inserted in there. So the long futures position ends up being 125,000 for a hundred troy ounces, which is the metric for the COMEX, and the Trader B is short the future. So this Trader B has, quote unquote, sold the future contract, right? Because when you’re shorting something, you think the price is going to go down, you want to sell that thing, you want to get rid of it because you believe the value of that asset is going to decline. And if you think something is declining in value, you want to convert it into another format, i.e., sell it, rather than hold on to it. Whereas the long position, again, as we say, hold, you want to hold it, you want to buy it, you want to buy more of it if it goes up, enjoy the fact that that asset is rising in value. Okay, so this is the setup.

Now let’s think a little more, and you’re going to have to do a little pause of the video and then open up the Excel and start using Excel to help express our understanding. The return depends on what things, the return is everything in the sense that it helps to determine if they’ve done well or not. And let’s just say this contract is a year from now, it’s a full 12-month period futures contract, right? As I said, deliver gold in one year. So what’s the spot price? This is key because what’s the current market price is super critical to understand whether or not there’s a who won this in this futures contract and who’s lost in this futures contract. So you swap the money for the gold, right? You gave them the gold, Trader A now has the gold, Trader B now has the money. What’s the cash upon expiry date? What, how much does Trader A have to provide? That’s 125,000. So now we’ve got the spot price in Year One. So we’re now coming to the point in time where we’ve got to give the gold. What’s the value of the gold? The spot price for the gold is now 1,000. So what’s the notional value? So pretty straightforward here, you would just multiply this by the contract unit multiplier, right? So that’s the notional value. And what’s the difference between this value and this value? $15,000. So in this case, Trader A made $15,000. Right? So the gold and the money switch hands, and this was the scenario. And we have $15,000 up for Trader A and $15,000 down for Trader B.

And let’s look at the logic of this. This is only possible because Trader A buys at $125,000, which they were locked into again a year in the past, they were locked into, committed to buying for that price. And then they, in the real market on the spot price date one year later, they possess what is in effect $140,000 worth of gold. So they can turn around and realize this $15,000 profit if they were to turn around and sell it. Trader B is not so happy, why? Because they sold gold with the assumption that it was going to go down in price. They get $125,000 in a year’s time, but if you can go in the real market and actually sell that same gold for $140,000, but they can’t do that. They actually have to, again, this whole thing has to happen because the futures contract stipulates that the money and the gold have to swap owners. And so Trader B is indeed in a sad face sort of mood because if they were to realize this loss, in other words, if they were to go in the market to buy up gold anew, they would actually see a $50,000 gap between the money that they got from Trader A and the money they need to actually buy the equivalent amount of gold in the market, the 100 ounces of gold in the market.

So now let’s do an Excel for Scenario Two. Alright, Scenario Two is $1,100. In this parallel universe, let’s say we locked in the deal at $1,250. But in this case, a year passes, and it turns out that the price of gold has gone down. So let’s open up Excel and do that exercise.

Okay, in Scenario Two, we had $1,100. So now, let’s simply calculate the notional value. It’s going to be this times our contract unit multiplier to get our notional. And then, to get the difference, make sure you get the polarity correct. It’s the notional value at one year’s time minus the cash upon delivery amount that has to be given. Trader A, this is all from the perspective of Trader A because they’re $15,000 up and now they’re $15,000 down. Kind of a bummer.

So now, Scenario Two, as we just calculated, it’s $110,000 minus $125,000. Trader A is not in a happy mood, and Trader B is in a good mood because they’re now up $15,000 in terms of their return. They got $125,000 at the end of one year when the actual value of gold one year from the start of the contract is $110,000.

Now, let’s flip the switch here and say that Trader A is in possession of gold right now. They’re going to enter into a Futures Contract with Trader B for cash. Why would they do this? Well, they have a hypothesis. The same environment of a recession is expected, but Trader A has a new interpretation of how that’s going to play out. They believe there will be monetary and fiscal loosening. In other words, the central banks around the world and in their country, in particular, are going to lower interest rates, making it easier to borrow. The government’s fiscal decision-making is going to involve spending more, injecting more capital into the broader economy, leading to an economic surge in discretionary spending. So, buying stocks, buying luxury items, people who are already well off are going to spend more and stimulate the stock market, driving the value of even growth stocks and value stocks upwards. So, that might be a hypothesis that is viable.

So, how does this impact the price of gold? Well, everyone realizes that during this recession, things are going to actually become more attractive to invest in. People are going to put their capital into stocks and bonds, but particularly stocks, now because of this firm hand of the central bank and the fiscal decision to increase spending. So, you want to catch up before the inflation catches up. The demand for gold is going to fall because people who have gold are going to take their capital out of gold and convert it into stocks, let’s say. Trader A, who has gold in their possession, shorts the future because this person has this hypothesis just highlighted here. So, they’re going to deliver gold in one year’s time, and their bet is that gold is going to fall in value over that year.

Trader B has the opposite view. It’s a recession; therefore, the default assumption would be people go into flight-to-safety mode and they put more into gold. They buy up gold, increasing the demand for gold. So, this person takes a long position, again with that $50 convenience yield.

Let’s see how this turned out. The return also depends on the spot price in one year for Trader A, same as usual. The activity happens, the swapping animation is a real thing, it went and happened sweet. So, Scenario Three, wow, overshoot on this one. It turns out that Trader A was even wiser than it even went lower than $150. It’s now a thousand-dollar spot for gold. Everyone’s just completely given up on gold. All those YouTube channels and other advocates of gold, who, by the way, have an ax in gold, right? They have a position in gold and they want to tell you that gold is the most exciting thing you should ever buy or Bitcoin is the most exciting thing that you should ever buy. And because they have a vested interest in the price of gold going up or, for example, Bitcoin going up, if they are someone who’s big on Bitcoin, they will make any possible argument to justify convincing you to go and buy those commodities or securities. And that’s the example, you know, if it’s a rainy day, why don’t you buy some gold? You buy gold because, you know what, people are in a bad mood. It’s cloudy, and this will cheer them up. Um, it’s a sunny day, you know what, gold would be good. Crops are now getting spoiled. It’s too hot, sunny day. The entire global economy is going to shrivel up in the sun. So, let’s buy some gold. It doesn’t really matter, right? For them, they just will generate any argument to justify it. And more sophisticated arguments like the BRICS countries, for example, are de-dollarizing, and we’re all going to return to the gold standard. So, you should get gold, you should pawn your wedding rings, etc. Anyway, that’s just a bit of a tangent. Let’s focus on this. It’s kind of funny, though. Those folks are now really disappointed and have egg on their face or whatnot, and they feel bad. But they, by the way, are going to continue to have an ax to grind in gold. That’s… And so, the difference is $25,000 for Trader A. What a great move, a good bet, as it would be stated, or good speculation. And it’s paying off significantly here. They might call themselves “smart,” but in truth, there are a lot of external variables that Trader A had no control over, and the predictive power is something that no human can really have. But hopefully, they’re smart enough to get that they’re not that smart, and they don’t have that immense predictive power, that this whole hypothesis completely played out perfectly for them. Doesn’t mean that it’s going to work in the next scenario or the next scenario because future events tend to defy expectations. So, you got $125,000 out of this deal.

Trader B realizes, “Ouch, this kind of isn’t that great.” You know what? How do you want to actually settle this contract? Instead of the swapping that we saw out there, why don’t we do something different? Trader A realizes this too and figures out, let’s not bother moving the gold around. Let’s settle in cash. And this is a huge deal because if you don’t have to physically move the gold back and forth based on how the contract is structured, you’re obligated to deliver physical gold at the end of the contract. Instead of doing that, why don’t we just cancel out these parts and just give Trader A $25,000? Trader B gives Trader A $25,000 if it went the other way. Trade A, you know, let’s just pretend $25,000 that way back and forth, just settle in cash. When we’re talking about this, it’s not just gold futures that we’re talking about. We’re talking about livestock futures, hog pork futures, corn wheat futures, lumber futures, silver, copper, oil futures, gas futures, equities, fixed income, interest rates, currencies, ETFs. You name it, futures contracts. They realize you don’t actually have to swap back and forth the physical commodity. And there are stories of people who had to, you know, they didn’t do this cash transfer agreement, and they had to accept physical delivery of cattle, but they had no intention of taking on or barrels of oil, like, “Hey, where do you want me to give you your thousand barrels of oil?” Oh dear. Most people just do this settle-by-cash thing that we’re going to get into detail about. It’s really exciting and a huge step forward in this futures trading innovation.

Okay, so now let’s ratchet up the intensity a bit further because what we just realized is that you could settle for cash, and you can do a lot more that way. And you don’t have to worry about gold flying around all over the place. So let’s get into the details of how this works.

Let’s say Trader A enters into a long position of 155,000 futures contracts. Trader B wants to short because, again, I think the price is going down. But they have to deliver gold in three months. A lot of future contracts on exchanges are three-month contracts. For example, remember the Dojima example where they were doing seasonality? So spring, summer, winter contracts. Similar idea.

So this is then the situation. Trader A has entered. One month passes, and the market price, the spot price, the current price one month into this thing is $1,650. Trader B can sell their stock of gold that they have for $165,000 rather than wait an additional two months and get that $155,000, right? They’re not in a good spot right now because of that. They’re not gonna… They’re not feeling… They’ve got a sad face, is what I’m saying.

Now, what could happen actually might be a better deal. Where Trader B convinces Trader A, “Hey, how about you short this position? Because look at where we are now, it’s $1,650. There’s no way it’s going to go any higher. So why don’t you short that position?” Trader A laughs at first, “What do you mean there’s no way it’s going to go higher? Maybe Trader A,” he says, or she says, “It’s going to go to $2,000. There’s no way it’ll ever go to $2,000. Is that what you’re saying, Trader B? Come on, I think it could go higher.”

Then Trader A kind of walks away, reads some articles, and thinks about it a bit further and says, “You know what? Actually, you’re probably right. It is probably going to go down.” So Trader A then shorts the future in coordination with Trader B, the futures contract to deliver gold in two months’ time. And Trader B is long this position because they’re going to receive $165,000 at the end of two months in this scenario.

So, as per the normal and “painful” way, Trader A, the first contract, the three months has elapsed, and the gold arrives for Trader A, and the cash goes into Trader B’s pocket. Same deal with the second contract. But wait a sec, what just happened here? Basically, Trader B got $155,000, Trader A got $165,000. So the net of those proceeds is really just $10,000, and that just goes right to Trader A.

But what we also did was this expansive thing of delivering gold to each other, physical gold. We swapped gold. What was the point of that? It’s actually almost silly when you think about it. So netting out, thanks to the standardizations of future contracts on exchanges, is a really powerful tool. We don’t actually need to physically settle these. We can just net the difference of what our two positions are and walk away just with the cash transaction. Because, again, these contracts are binding.

You enter into a futures contract, you have to settle. You can’t walk away from it. And the exchange, whether it’s the Chicago Mercantile Exchange, the New York Commodities Exchange, the TMX in Toronto, Montreal, and Canada, or elseag, the London Stock Exchange Group in London, or just listing all these exchanges, it depends which exchange actually creates and manages these futures contracts.

So, the COMEX one that was gold-relevant was for the New York Commodities Exchange. They managed the futures contracts for gold that I’m referencing here. These folks create and manage these futures contracts, standardize them so that you can’t walk out of them. And if someone were to default, there’s always going to be someone else with a futures contract that could fit the bill. Someone has an ax to grind, they think it’s going to go down, another person thinks it’s going to go up. You can match these people in an exchange, so it becomes a more sophisticated and kind of beautiful system. A system where you realize, “Hey, wait a sec, you didn’t need to swap the gold between each other. All you needed to do was net out this $10,000, give it to Trader A at the end of this three-month period.” By having these two contracts live, they net each other up, and you get the $10,000 to Trader A, who was correct in their bet. And so this is where futures becomes kind of a speculative tool.

So let’s actually talk about novation of contracts. If neither party wants to physically deliver gold, they don’t need it in their manufacturing, they don’t need gold in any way, shape, or form, then you can enter into a contract such as this. You can’t rip up this contract, so it’s as real as an actual physical delivery of gold, as the same example here. I’m just saying the market price, let’s say, goes down. So in this case, Trader A is concerned because they’re going to be paying $155,000 in three months’ time to Trader B, but the gold now is only worth, a month later, $145,000. So they enter a kind of canceling out deal here where they short the future and say, “I will give you gold, you give me $140,000. I’m willing to accept that.” And so what happens is you net this out. Again, in this case, Trader B is successful.

Neither party actually owns physical gold. Let’s pretend actually just forget the whole gold symbol at all. There’s no gold being exchanged, but they are in the futures gold contract. They have netted out the proceeds, and $10,000 is awarded, yay, to Trader B in this circumstance.

So this is really a process of novation, and what enables novation is that really, in an exchange, this whole Trader A, Trader B relationship is kind of exploded. You don’t need a Trader A and a counterparty. Trader A doesn’t need to ever meet, know, or converse with Trader B or negotiate with Trader B or anything like that. And we’re going to show how, in fact, that whole construct is just an educational means to explain futures contracts.

Now let’s get a little more sophisticated and ratchet up the complexity a bit further. So if it works for Trader A and Trader B, novation can really work for hundreds and thousands of traders or anyone who wants to take an opposite position. They’ll find someone to match them with on an exchange. And that’s the key with novation. It’s really the process by which traders do not actually interact with each other at all but, in fact, settle these highly standardized contracts on an exchange that the futures contract is hosted at.

Let’s take this to the next level. We’ve got the same two traders as before. We’ve got Trader A and Trader B. So we start with the market price for any commodity. It could be aluminum, it could be corn, it could be bonds. It doesn’t matter. This is just an example. But let’s say this asset on day one is $20. So Trader A thinks it’s going to go up in price. They don’t want the underlying asset. They want to enter a futures contract. They don’t care about delivery of aluminum or whatnot. So they enter a long position of $20. And who do they have to do that with? They have to have a counterparty. Well, conveniently, Trader B is available, and they’re short $20. They think that the price of whatever this quantity is is going to go down. So that’s great. We’ve got one contract out in the market right now.

So here’s the key thing, right? If it’s $20 long, then Trader A is saying, “I agree to buy this asset in three months’ time at $20.” If you’re short, that really is another word for sell. “I agree to sell this asset in three months’ time for $20.” So here’s where things get interesting. Day two, the price of this asset is now $24. Okay, Trader A is probably thinking, “What is this good for Trader A or bad for Trader A?” Pause the video, think about it, and then unpause. So it’s definitely great for Trader A because the price has gone up. And as I said, this is the reason you go into a long position because you think the asset’s going to go up in value. Trader B is thinking, “Darn, this is not great. Um, what should I do?” It’s a situation where I’m now in a loss of $4 already. Trader A says, “You know what? I want to take out my profit right now, and I’m going to sell. I’m going to take the opposite position. I’m going to short at $24 because I want to take out the profit.” Trader B says, “I’m not interested in closing that position, right?

Because that’s not in my interest to take a long position on the $24. I don’t think the price is going to go up any higher.” Trader A is short $24, but that contract isn’t fully complete until there’s a counterparty that takes the opposite view. And now we’ve got Trader C who takes a long position. This is a third trader. There could be hundreds of traders, and in fact, thousands as well. But here we have Trader C takes the long position on $20 at $24.

Now it’s day three, and the price has gone up further to $28. Alright, so day three prices, as I said, Trader A’s closed out. Trader B and Trader C, maybe they want to take an opposite view, maybe they want to trade together through the intermediary of the futures contract and through the exchange, not talking to each other or interacting with each other in any way. So Trader C actually shorts at $28, and that’s perfect for Trader B because Trader B happens to want to close out their position, and they can only do that by going long at $28. So they’ve canceled out their positions. They can’t have two shorts or two longs or more shorts than longs. They have to have an equal amount in order to actually close out their positions.

Trader A has Trader B’s hats, and Trader C has now, let’s say, three months have elapsed, and let’s pretend the price stayed at $28 for that period, or it lands at the three-month mark at $28. So Trader A is going to get $20 for an asset that’s actually worth $28. Now they have an asset that’s worth $28, so their profit is actually going to be $4. Why is that? Because they took a short position where they have to deliver the asset for $24. So all in all, they are up $4. Trader C, same story. They took a long position of $24, and the asset went up to $28. So they have an asset that’s worth $28 in their possession, and they took a short position at $28. So all they do is they hand that over, profit or loss in that circumstance. So their total profit is $4. Trader B, on the other hand, they took a long position at $28. The current asset price is $28, so they don’t see any profit from that. But they shorted at the start with Trader A. They are the ones that deliver the $28 asset to A, and they then lose $8 in this whole deal. The key here is that there are three traders here, but you can have thousands upon thousands of traders because Trader A could do a deal with Trader G. Forget the alphabet. There’s not enough letters. There’s basically all these thousands of people that are taking opposite positions from others, and they’re speculators in terms of the underlying asset’s value. They think it’s going to go up or down. If you can find a counterparty, and by the way, when I say find, I’m not really being correct when I go to Futures exchange.

There are Futures contracts out there. The exchange is the intermediary, and we’re going to get into more depth as to how that actually works in a sec. But the key lesson here is that you don’t have to have the underlying asset to be engaged in Futures Trading, and as such, Futures Trading is a large speculative market for many people. There are also hedgers. We’ll make some distinctions about who participates in this market, but there are a lot of participants who are taking basically bets on the future of a given asset, and they’re not trading the underlying asset. They’re making these positions, they’re opening and closing positions on the asset to try to make profits. And from a philosophical perspective, the financial purpose of this is that in their participation, they are providing what’s called price discovery. They are providing the market with an understanding of how this asset should be priced in real time, and they’re committing their real capital to it in the service of their own self-interest, which is to win or lose these bets. They obviously want to win those bets or speculative positions, but in that service, they’re also providing more data points for what actually the price should be on an asset and informing decision making.

Forwards versus Futures contracts

So now we’re going to talk about forward versus Futures contracts because we need to make now the distinction and just make sure that this is locked in your head and you get it. A forward contract is a unique contract, okay! It’s highly customized. It’s private. It’s over the counter or over the phone or over a dinner. You know, you can have the manufacturer of the flour and the baker get together and have lunch, and they would draft a legal document, a forward contract. The problem is there’s no oversight, and it’s possible that the baker could go out of business and not fulfill their obligation in terms of buying, giving the $70 to the flour maker, for example. In their example, we had before, there’s a specific end date, which is good, but it’s not so good in the sense that if you want to keep going with these contracts and it does end, and there’s no obligation to continue, and it’s a one-off agreement often. So forward contracts are quite narrow in their scope, and they are not exactly fit for purpose for the broader financial system. And one snag is that we talk about the forward price in a Futures contract. So don’t get those mixed up. This is a forward contract. Forward price is the price that is agreed to in the Futures contract.

Now I’m hoping by going back to this sort of textbook definition stuff, this will start to make more sense. Because we looked at some practical examples already, and now this is starting to kind of coalesce. There are two major distinctions between a futures contract compared to the forward contract. So these are the futures contracts, which are legally binding agreements to buy an asset at a specific date or month in the future. The month in the future concept will show that there’s actually a window in which you can deliver a set of bond futures, for example. Futures contracts are standardized, right?

I’m exiting out on the left all the things that are different here. Forward contracts are very, very customized. It’s identical to all futures contracts. All futures contracts are identical to our participants via an exchange, and they’re managing the quality, quantity, physical delivery time, and location of these products. And this makes this futures contract an indispensable tool because it’s so much more dynamic than just a one-to-one relationship between two counterparties, as with the forward contract. It’s kind of like when you get a student loan, you go to the bank and you have a loan, whereas a company issues new corporate debt, and then suddenly there’s this ecosystem that grows out of that where people buy and trade that company’s debt, independent of the company. It’s independent of the underlying company relationship. And you know, certainly people are trying to do that with student debt to try to create an ecosystem. But in reality, a futures contract creates an ecosystem in the same way. They have many participants taking positions, whereas a forward contract is really just two people, a dinner table agreement written in legal wording and contract obligations. Here we can have bushels of wheat that are standardized. We have sets of bonds that are standardized. The only variable that really changes in a futures contract is the price. That’s the big key differentiator. And contracts are created by the regulated exchanges, right?

We talked about the Dojuma Exchange, the Rice Exchange. We talked about the CME, the Chicago Mercantile Exchange. Basically, at its core, there’s no default risk because every exchange contract is centrally cleared. There’s a buyer for every seller, and it’s automatic. If you have a short, then someone had to take a long by definition. There’s no question about that. But the key is, with the forward contract, the baker could go out of business and not fulfill their obligation to buy at seventy dollars for the bag of flour. But here, we’ve got the central exchange taking a critical function, and they add some additional sort of tools in their toolkit to protect themselves from this risk. But the default risk is not held by the participants. There is, however, risk in taking a position on the futures contract. The highly liquid nature of it is key too, so good for price discovery. It’s anonymous, right? You don’t have to know trader A, trader B, trader G, trader E, trader 10,000. And in fact, the more traders there are, the more indicative the above the nature of the underlying asset and the amount of energy around that asset at the time. And so, you’re getting some price discovery. You’re better understanding the underlying value of this asset at that point in time. And that spot time is when people are making financial decisions on where to allocate their capital and resources. So, it’s all part of this broader ecosystem of decision-making, really.

So, this is a classic textbook definition. On the bottom of the screen, this is the one that everyone starts out learning from. And I found that this was kind of annoying because if you don’t have the context, if you don’t have a broader sense of the examples that I’ve shown, I think it has helped, hopefully, with providing a little more color than the way that they’ve done it here, which is to list out all the different participants. We’ve got the hedgers and speculators. We’ve got traders, trades on exchange, underlying assets listed. You have all these assets listed. The key is the definition.

It’s like, okay, you walk away with a definition, but then it just seems like a sentence. Whereas I want to make it more tangible for myself and yourself to better understand this topic. So, futures, now I think it’s good to talk about philosophically. It’s kind of built on this long arc of progress as we’ve suggested, bending towards over time an ecosystem of better measuring value, of ways to better measure, quantify things. And as flawed as it is, it’s actually a reflection of human nature. And we, as humans, as you may have noticed, are kind of flawed. So, this system is an expression of an underlying thing, which is how our brains work and how finance is developed as a product of that. Just remember the story, right?

Futures and other financial ideas have fun origins stories

The forward contract was basically something that Thales of Miletus was using, the baker and the manufacturer, and it’s really about delivering, you know, pork bellies at a specific time on a specific date. And as we’ve said, futures are standardized. So, futures are really an expression of taking this forwards concept and really building on it. And I think it’s just worth taking a step back. A lot of the concepts in finance come from humble origins. They come from a simple place. For example, feudal lords in ancient times, we’re talking, you know, thousands of years ago, who had property passed down, probably through military victories being warlords or whatever. They had this property, and we can argue if that might be actually wrong that they had that property, and why do they have it? How do they get it? Is ill-gotten gains legitimate? Well, reality is uncomfortable. It sucks, and it’s just unfair. That’s the way the world is. These feudal lords have this property, and they lent it out to other people who can create value with that.

So, feudal lords would loan out land to shepherds, and shepherds would buy sheep and get sheep on that land. And so, borrowers had to provide some percentage of their flock of sheep back to the property owner at the end. And it might surprise you to learn that in Aramaic, the word for sheep sounds remarkably like what we use as the word for interest. The word “interest” comes from the ancient language Aramaic’s word for sheep. So, this whole concept of interest is actually just an expression of a pretty simple relationship. So, my point is really humble origins equal a modern system.

Another classic that I think I’ve already mentioned is the time value of money, right? If I have a hundred dollars today, then I can benefit from compounding interest. And if I look at the value of a hundred dollars in a year’s time, it degrades and discounts over time if I allocate it somewhere else. This discount team basically helps decision makers fully understand the costs and benefits of a specific decision and its future impacts. But what is it really about?

I’ll tell you, it’s actually about human nature. I want money now. All human beings want things now. They would prefer things in their position right now rather than at a future date. So you need to pay that person interest for giving you their money. They need to get some benefit for giving you their hundred dollar bill rather than them holding onto it themselves. It’s like, “I want an ice cream cone right now. I prefer it right now over in a year’s time.” So the whole financial mechanisms, all these things, actually come from humble origins or humble preferences. And we create sophisticated, quote-unquote, technology financial innovation or systems to really, when it boils down to it, express simple things, concepts into incrementally more complex financial technologies or solutions.

Derivatives are a huge part of finance

So really, where I’m going with all this is, because we’re going to go back and do actual bond futures math shortly, it’s a bit of a tangent, but the size of the derivatives market, all right, it’s estimated to be 1.2 quadrillion in notional value. This is an estimate of the total value of all outstanding derivatives contracts. And this can also include physical currency deposits, other liquid instruments held by households, businesses, governments, and central banks.

And my point is that the global debt markets are estimated to be about 100 trillion. So the U.S. has about 30 percent of the global debt. The rest of the world, Canada in particular, has 1.6 trillion in debt as a subset of this. So I mean, obviously, 29 trillion would be what this is, right? If there’s a hundred trillion, 29 trillion in the U.S., 26 trillion in Europe, etc. Japan has 20 trillion. So that’s a lot of debt. The global stock market, okay, it’s actually estimated to be about 91.3 trillion. And here in Canada, land, we have actual trading per year of about 1.12 trillion, and it’s growing as debts balloon.

So really, you can see that the broad money is 90 trillion, gold market is only 7.8 trillion, a 19 held by the IMF and central banks. I guess the point here is that this huge derivative space, as I just said, it’s huge. And the reason, as we can probably unpack now, I think, is that if you aren’t actually delivering the physical asset, but you are basing the outcome of the trade on that physical asset’s current spot price, the market price for that asset, you can really create a much larger speculative, you could say gambling, but speculative or hedging market that has lots of participants coming in and out of it all the time, just comparing the world’s money and markets by size.

You can go through and see, you know, the wealthiest people, the largest companies, the Federal Bank’s balance sheet. You can kind of compare all these different sizes of this money system, and it’s kind of a neat visualization. I’ll definitely cite it for you. You can take a look at yourself. But as you can see, there’s a whole bunch of debt out there, and then the derivatives market, this number is fairly different from the one I just quoted.

All derivative contracts are worth 1.2 quadrillion, so it’s a sort of a neat visualization. It’s a pretty fascinating visualization, so this is very much a futures course. But we should talk about other types of derivatives and understand their relationship. And again, we know that derivatives are a product that derives its value from something else, but it isn’t that something else.

I want to think of another practical example just to help out with solidifying this further. So imagine you reserve your right to own a condo. You buy a pre-construction condo in a building that hasn’t been fully finished yet. So you’ve reserved your spot and you’ve deposited fifty thousand dollars to do so. So you’re in the queue. And then a couple months later, you decide, “You know what? I actually want to live in the suburbs. I don’t want to really live downtown.” So instead, you phone around your friends and you say, “Hey, do you want to lift me for this fifty thousand dollar deposit? Like, I have this reserve spot. There’s a finite number of condos in this building. I know you were interested. I have the spot, you don’t have the legal right to a condo. Do you want this limited edition lakefront condo? The deposit right for access to the actual condo.” So that’s basically a derivative right.

You’re the person on the other end of that is saying, “Okay, sure, yeah, for 50k.” It’s like, “Well, actually, I just want a little bit of a sweetener too, like an additional thousand dollars because there’s no way you would have had this access without me giving it to you and selling it to you.” So that’s an example. You’re not actually trading the condo itself; you’re trading the right to the condo at a future date when it’s actually finished. So almost anything can form the underlying base for a derivative, and that’s one of the major reasons why the derivatives market is just so huge. It’s not the product itself; it’s a product that derives its value from changes in that underlying thing.

Three major products of derivatives

I wanted to highlight the three major products. So we’re very familiar with futures now, right? It tracks the underlying asset without ever having to store the asset, unlike a forwards contract. A future is traded on an exchange, but they’re essentially the same thing or very similar. Options, well, I want to talk about this just because it’s quite fascinating, and there are other courses and other big areas as well. But you’ve heard of puts and calls. Basically, it gives you the choice about whether to buy or sell an underlying asset, and there’s some flexibility there. So you pay a premium as a result.

A great way to remember what’s the difference between a Call and a Put. The real original concept was to call across the trading pit, right? In a trading pit in an exchange, call them towards you is to beckon the trader over to you to complete your call. And if you wanted to get rid of something or have a position of a put, you would put that away from you, a trading pit of what a put and call is, and now it’s all abstracted, but that was the original physically call. So bring it to you by put is sell. That’s an important another little side note.

Then there are swaps, which is sort of basically just changing your exposure to an underlying asset. So swap contracts are agreements between two parties to exchange cash flows over a certain period of time. All of these are really, really useful for a couple of reasons. The biggest one, I think, is they’re just very flexible. And in the wrong hands, they’re actually quite dangerous, and you could lose a lot of money. And I want to emphasize that as well. But there are basically these different uses. The one is sort of the speculation or gambling, taking risk, taking a directional bet on anything you like, and it’s just to take on risk. You find that unsavory, and instinctively, I do as well. We’re always making bets every day.

We’re making risks when we start a new business, when we purchase a house, when we drive our kids to school instead of putting them on a bus, when we decide Colgate versus Crest toothpaste. We’re actually making these bets or taking an informed probabilistic assessment of what is the best decision and then correspondingly getting risks and rewards. So the term “bet” is a bit more crass. Hedging is the exact opposite of gambling. Hedging is reducing your risk. So you’re worried about an asset falling in value, well then you take an option, you take a position that would offset that. An arbitrage opportunity is taking advantage of a short-term price difference.

And so, for example, if you found apples at one market, the Honey crisp apple selling for one dollar in one part of your community or town, and then you go down the road to another market, and you see that those same apples are being sold at a dollar fifty, the exact same apples, well then you would buy up all the apples in the first market, and you would go over and sell them to the farmer who’s selling them for a dollar fifty, let’s say, and you get a 50 increase, you get 50 cents on each apple. And eventually, what happens is these prices will normalize, and they’ll probably normalize to a dollar 25 each for example so that’s a concept of Arbitrage.

Structured products offer a limited downside and are marketed to uncertain investors, and they combine derivative solutions. Structured products are something to be wary of, and they are really well marketed. It’s a complex financial instrument that’s typically composed of multiple assets: stocks, bonds, derivatives, options. They often provide customized solutions to investment and risk management problems. So, structured products can be used for hedging, speculation, and to generate a steady stream of income. They can be tailored to meet the needs of the specific investor or market conditions. However, they come with a lot of hidden risks, so beware.

Speaking of risks and re-centering back on futures contracts specifically, they are very risky for first-time investors. That’s because of a thing called leverage. You can commit a small amount of capital to control a large asset through futures, and that means that small changes in the underlying price can cause large gains or losses in equal measure. We were talking earlier about forward contracts versus futures contracts, and the two major distinctions are that futures contracts are legally binding agreements and they’re highly standardized. One thing we touched on was that there’s no default risk for the individual in that there’s, in a way, that a forward contract. There is what exchanges create as a safe space to transact these contracts, and in order to do that, they have to present you with the requirement that you provide good faith deposits to be a participant. You actually have to fork over some capital to even be allowed to purchase futures. So, just reiterating what I just went over here. So, leverage allows trades to commit a small amount of capital again to command a large asset. Therefore, there’s a risk of large gains or losses in the process or before the proceeds. Futures only require a fraction to be invested by the speculator, and this concept is known as margining, as I just said, margin. The exchange requires it in order to pay for their services and cover their costs. It’s a commission in a way as well, but it also makes sure that you don’t run off and not abide by the contract.

Let’s imagine Trader A wants to do what we were doing before, which was invest in a gold futures Comex exchange. So, we have all these futures exchanges all around the world. We’ve got the TMX, LSAC, CME Group, ICE Comex, as you can see, blah, blah, and blah. All these exchanges require this margining concept. You might have an initial margin that you have to put forward. In this example, let’s just say it’s 7% of that classic gold futures contract that we had earlier. So, you’re long the future. In other words, you’re buying the right to own gold at a future date for a set price today. And that set price, in this case, is $155,000. And in order to participate in this, you had to give the exchange $10,850. If the spot price drops to $100,000, a $55,000 drop, you’ve lost $55,000 on your $10,850 deposit. So, that accounts for an over 500% loss. You have to actually bring the additional capital to cover your total loss in that case. This is a way for the exchange to make this market a living and safe market for them to operate. So, you need to put in a futures account an initial amount, and it’s called the initial margin, which is, as I said, maybe 7% sometimes, anywhere between 3% and 12% depending on what the exchange and the futures contracts are. But added to that, you also need to potentially add more money in the account because of the maintenance margin. If the performance of the futures contract goes down, you will actually need to add more money into the account in order to maintain your right to the futures contract and to be a participant on the exchange. I’m going to show you exactly what I mean by this initial margin and maintenance margin now so that this is a little more solidified.

In the previous slide, notional value was $155,000. That was the notional value, and from that, we were able to calculate the 7% initial margin. That was the amount that you had to post up, and it’s obviously just a fraction of that total notional value that the futures contract is dealing with. So, that’s another way to sort of think of the concept. Let’s take Trader A and Trader B and take a look at their relationship as it is with the exchange. Let’s say they’re trading the S&P 500 E-mini, which we’ll describe a bit later, but basically, it’s just a futures contract on the performance of the S&P 500. Each trader has to put an initial margin of $6,500 just to participate and they put it in their futures account. Now, that’s the amount they have to start off with to be players in the game. And then they also have a maintenance margin, which is to say that if the notional relationship between the notional value and the percentage initial margin drops below a certain absolute number, there will be a margin call, and the trader will have to post up more capital to keep participating. We’ll show this in a more vivid example here. Let’s just say one basis point of the S&P 500’s performance is equivalent to $50. So, you’ve got this one point equaling $50 for argument’s sake. Now, the S&P 500 is a number that helps people instantly see how well the overall market is performing. And the S&P 500 actually measures the stock performance of the 500 largest U.S. publicly traded companies. The point value reflects the total market value of all these stocks, which is calculated by adding up the current market prices of each of the stocks and then dividing by that total number of stocks. And it generates this number. So, at the start of the day on this given day, it was 3,805. At the end of the day, it was 3,800. So, Trader A, who’s in the E-mini for this contract, long on it, has lost 5 points on this thing. So, what does that actually calculate out to in terms of a loss on the day? Well, it’s $250. Trader B gained $250 because remember, if Trader A is long, Trader B here is short. It doesn’t have to be Trader B; it could be Trader 3000. But the point is, it’s a trader who has gained on the short position, $250. So, how does that actually impact the futures account for these two traders? Well, we have to debit $250 from the $6,500 initial margin that Trader A has on file, and then we have to credit $250 to Trader B, who has $6,750 now in their futures account. So, their balance at the end of that day, remember, at the start of the day, they had the initial margin. At the end of the day, Trader A now has $6,250, and Trader B has $6,750. And that’s how the next day’s trading will start, and the exchange will evaluate the current situation of each futures contract holder based on the performance of the previous day and continue based on the existing margins they have.

Its day two, and Trader A might be a little worried because they’re halfway down to hitting their maintenance margin, which is $6,000. Trader B is very happy with exceeding their initial margin, so they’re up on this whole contract now. The same rule applies: one point equals $50. The start of the day, it was 3,790, and it goes all the way up to 3,810. That’s a 20-point gain. So, what’s that look like? $1,000 up for Trader A and $1,000 down for Trader B. So, Trader B went from $7,250, and now their final balance is $6,250, whereas Trader A’s final balance is $6,750. So, if you look at the performance on this futures contract, because the initial margin, the margin call issue, was a Trader A issue with the exchange and their broker, nothing to do with the actual futures contract, the actual performance is 6,750 divided by 6,500, which is a gain of 3.8%, and 6,250 divided by 6,500, which gives us a negative 3.8%. So, an equivalent gain and loss. As with all futures contracts, it’s a zero-sum speculative exercise. Now you get a sense of how futures margins work. It’s a very risky game to be playing, so you have to pay attention depending on the specifications of the futures contract. You want to pay close attention to what your obligations are on a daily basis if it is required to do mark to market, for example, and this is an example where that is the case.

Why mark to market matters

This mark-to-market concept is really important because this is a bond futures training course, so we want to tether back to what we’re actually focused on in the end, and that is this over-the-counter market known as the OTC or over-the-counter market. It’s a very historically opaque market in fixed income. So, you would have two participants, a sell-side and buy-side participant, basically coming together and signing a contract and trading bonds for cash or whatever the transaction was. It’s become more electronic over time, but it’s definitely lagged over the equity market, which is highly liquid and highly transparent. This is more of an opaque market. So, what’s interesting is that futures can help with increasing the transparency in this market. But first, let’s understand the fixed income ecosystem.

Governments, corporations, and people all need debt to a certain extent, whether it’s student debts and loans, for example. Corporations issue corporate bonds, governments issue government bonds, and then they get the actual capital, cash, in exchange for issuing those bonds, and they go to the buy-side eventually. Well, they issue them through dealers, but the buy-side itself, all these different types of folks buy the securities from the sell-side: dealer brokers, investment banks. And there are all these different security types. This is actually not a full list, but the point is that it’s a fairly opaque market. You don’t just go and buy bonds yourself readily and easily. It’s more of an institutional market, and that’s why it’s relatively arcane or not well understood by the general public. And that’s why democratizing this knowledge, I think, is really of value. So, let’s get to the details.

The FTSE Russell in Canada and the UK has a FTSE, as well. They are always seeking to have indices to create a daily settlement price at the end of the trading day. So, you do all your bond trading, and then at the end of the day, there is a set price for each security that would be very transparent. And that’s how we attempt to evaluate the performance of our asset managers. If you give some asset manager, if your pension has an asset manager, well, they are evaluated on their performance. Let’s say they have Q3 performance of 3.1%. How do you actually know that? Well, in Canada, here we have the FTSE Russell Canada Universal Bond Index, which has a collection of viable corporate, government, provincial bonds in an array. And the asset manager has outperformed it by, in this case, 50 basis points. But how do you know that? Well, they have all these bonds. I just have three here for simplicity, one, two, and three, but there are roughly thousands of bonds. And the asset manager will weight them differently from the way the index weighs them. So, the index weighs them as 33.33% each. So, 100 divided by three is 33.33333 into infinity.

So in this case, though the asset manager might have waited for a particular type of bond higher and another type of bond way lower to get this outcome, they’ve overweighed the index weight and underweighted these ones. So that’s how they evaluate their performance on a daily basis in the bond market, which is fairly opaque. So, bringing it back to the Futures market, futures have an official settlement price, the final daily settlement price for all participants. That’s what makes the Futures Market unique, is that the daily mark-to-market prices of all futures are publicly available, and all the calculations are made publicly available.

And the final daily settlement prices are the same for every person, which is amazing. The mark-to-market has always been a feature of this Futures market, and before reforms in the over-the-counter market, recently, it was very opaque, and people didn’t know, and to a certain extent, they still don’t really know. However, the Futures Market has led the way. Individual contracts may have slightly different settlement formulas, but the methodology is fully public, and that’s made public so everyone can calculate it. And so, in the actual TMX contracts for a given security, here’s the CGB, which is the 10-year Government of Canada Bond Futures. The calculations are made available and detailed in how the entire bond works. The Exchange actually calculates out the final daily price settlement price. So that way, the broker can calculate the profit and loss performance from the previous day. The broker will make appropriate debits and credits in your account accordingly.

Futures margins

If you, for example, as we showed, breach your margin and have a margin call, so no cap losses are carried over from the previous day, they just have to clear at the end of the day. So, if your daily losses go below a certain threshold, as we already showed, you have to pony up more cash to continue participating; otherwise, your positions are liquidated. So it provides a mark-to-market really provides a daily discipline of profit and loss that eliminates any carry forwards that might endanger traders, brokers, and the Clearinghouse. And this is how the Exchange provides this financial safety. It’s a financial safeguard for the Exchange. So, at the final end of the day, you know exactly what the position is, and then you can debit and credit at that level. And the Exchange provides a great service to all market participants as a result. It includes information about the underlying products as well.

If the Futures Contract is this, then there are assumptions about what the underlying security’s value is as well baked into that. And you can reverse engineer and get a better understanding of what the market is actually doing, thanks to the Futures market. So we talk about P&L now a little bit because this is important. And the first point I want to make out is that there’s the units for measuring performance in Futures contracts, and that’s the point value, also known as the multiplier or the contract size. And you need to know the point value well.

Point values

And every Futures contract represents a certain amount of that underlying asset, as we’ve discussed before. So, for example, the COMEX gold is 100 ounces of gold, troy ounces of gold. The NYMEX oil is a thousand barrels of oil. That’s pretty standard for oil. Corn, 5000 bushels of corn. Natural gas, 10,000 British thermal units. What’s good is you don’t actually need to necessarily understand the underlying unit measurement. You just have to understand the point value or contract size multiplier concept pretty well. Total dollar’s gains or losses on a contract if it moves by one dollar is important to understand. So values are defined by the Exchange that manages the creation of these Futures contracts in the first place. And so, you have to play the game as it’s presented. And right now, I want to focus on again the P&L concept. People talk about, “Oh, your P&L is impacted.” The dealers and the asset managers and even retail investors all have to look at the profit and loss.

What that really is the financial, from the financial statements perspective, it’s really the income statement. So it’s the most comprehensive view of a company or your own income and expenses over a period of time. It shows the net income and the loss for the period, as well as revenue, cost of goods sold, expenses, and other incomes and expenses. This information helps a company evaluate their performance and make decisions about how to manage their finances going forward. So, at the P&L calculation level, let’s take an example here. We’ve got the December 2024 crude oil calculation. Let’s say the decision is to buy one contract at fifty dollars. A thousand is the point value. What’s the sell if the price goes up by one dollar?

Now, remember, this fifty-one represents the price at the end of that trading day, the 4 pm Futures price. So pause the video, maybe do this out in pencil. I do have it in Excel, but I’m not going to bother showing you in Excel how to do this. It’s fairly clear that in this case, if the point value is a thousand and the price has gone up by one dollar, then your P&L should show a gain of one thousand. So P&L equals the change in price times the point value times the number of contracts. We’ve got one contract, we’ve got a point value of a thousand, and we’ve got the change being fifty-one minus one.

So unrealized profit and losses are absolutely real in the transaction. Let’s say you have bought five contracts of whatever the point value is 100. I think this would be gold. Let’s say the price is 1251.5 USD and then the price goes down to 1249 at the end of the day, and the P&L impact is going to be minus 125,000, right? Because you sold and so we have to make sure you get the order right here. This is negative because this was the original value and then your new value, right? The delta is negative. You times it by the point value and then by the number of contracts that you have in questions, so it’s 1250. Let’s try another one. So this is the S&P 500 E-mini.

Let’s say it’s the June 2025. Valuing assets and liabilities at the close of each day, the last known price is what we’re talking about here, this mark-to-market concept. So we’ve got day one, the number of contracts is one, price is 2700, and the point value is five, and we decide to hold. And on day two, the price goes down, so your P&L because you’re in your seller position, your P&L is 500. So in this case again, the change in price times the point value times the number of contracts generates this 500 total. It’s day two, we had that 500 growth that you got the gain that you had. So let’s say on day two, the number of contracts remains the same, and the value goes up to 2750 at the end of the day.

So remember, you’re in a sell position, and the value of the commodity has gone up. If you’re shorting a futures contract, remember, and the price goes up, you’re losing money in that case. So how do you calculate that? You get 3,000. So the math is the delta in price times the point value of 50 times the number of contracts, remembering that we’re doing the, um, you’re in a sell position. So you do your 2690 minus the new price to get your negative. Check logically in your head if it makes sense. If you are the seller and you’re shorting something, then, and the price goes up, then you should know that your P&L is going to be negatively impacted. Inversely, if you are in the short position and the price goes down, then your P&L is going to be positively impacted by that change.

So understand the underlying logic, and you don’t have to worry about where you position this number and this number in your calculation. And remember, the hypothetical 3,000 dollars is deducted from the trader’s account at the end of the second day, impacting margin. But this isn’t necessarily the end of the contract, right? So it’s only realized at the end of the contract or you cancel your position and you’re removing yourself from the position. So the point is this: futures mark-to-market mitigates risk. It’s all about quantifying the risk in real time and understanding what’s going on in the futures contract over time and what your position is, and it’s marked to market on a daily basis so that your manager, the asset manager company, if you’re in a bank, the dealer, they can actually evaluate your current performance on your positions that you’ve taken, and they can understand the overall position of the financial institution generally.

Fair value of a futures contract

So now let’s imagine we had to calculate the fair value of a futures contract when we had the bag of flour. We said 70 bucks as the fair value, and you get 70 bucks at the end of the contract, and then based on the agreement, someone’s a winner because the actual price may go up, and someone is unhappy. Someone’s happy here. The baker’s happy in the case where the price went down dramatically. The baker is unhappy because they have to pay 70 dollars for that bag of flour. Now, in reality, this seventy dollars is pegged against the spot price. Let’s say the spot price at the time was seventy dollars. Well, in futures contracts, there’s usually a difference because you have to take into account all these other factors like storing and all that. So it wouldn’t be 70 at the end. In reality, it might be something. If it’s contango, we’ll talk about that in a bit. If the price is upward sloping in terms of the futures curve, then it would go up.

Let’s say it’s 72 dollars. But if it was backwardation, then it would be going down. It’d be like 68. So let’s get into that. The first point I want to make is there’s a lot of arbitrage opportunities that can be realized in the futures price if the represented expected future value of the underlying discount is incorrect. Any deviation from the theoretical price, that is for this futures contract, the price that is agreed to, is a riskless profit opportunity and attracts buyers of the underpriced asset and sellers of the overpriced asset, right? You know, if your hypothesis is that it’s underpriced, then you would buy. If your hypothesis that it’s overpriced, then you would sell.

In other words, if you think the futures price is wrong, the fair value of the futures contract should be 68 for the bag of flour, not 70 or 72 for the bag of flour. Then you would want to take that into account in your calculations, and that drives the relationship between the prices back to an arbitrage-free state. In other words, it’s a hyper-efficient market because everyone is trying to realize an arbitrage opportunity, and as such, they drive the price back to an equilibrium or an arbitrage-free state.

I’m going to show you a classic formula. This is sort of very academic, so I’m a little hesitant to do this, but this is a classic formula for how to calculate a futures contract price. And so what do each of these icons represent? First, you’ve got time to delivery denoted in years. Then you’ve got your spot price of the underline today at Time Zero at trade inception. That’s that little figure. Then your forward futures price today. That’s actually what we’re trying to calculate. And then your risk-free rate annualized is the r, and you need to use Euler’s number. And he was a genius mathematician who basically is super critical for all of math at this point. And let’s go into Excel, and I’ll show you how this is done. So in Excel, we have this set up for the fair value calculations.

This is an Excel exercise, and I want you to basically complete fill these three cells up in the Excel. So take a crack at this, pause the video, go into the Excel, try it, and then unpause the video, and I’ll walk through it with you. Okay, so we’re in the Excel, and I’ve got the calculations in here. This is a forty dollar equity price on the spot. The date in our flowerback example, well, okay, so it would be seventy dollars, and you know the amount that you would receive at the end would be 70. But what we’re saying here is that the value of the futures contract today is 43 dollars. So there’s a three dollar contango, upward sloping futures curve for this calculation. Here we got our risk-free rate, that’s five percent, right? 0.05 is really it converts into five percent. And then we’ve got the time to delivery, so this is a three month contract, and the contract unit we have just one contract at play, but we want to make that dynamic so we’re and I’ll show you how. And so we’re also we’re really trying to find out what the forward futures price today that a short position would accept based on this available information. We’ve got the Euler number, which is static. That’s always the same number. It actually goes off into infinity, but for this precision, we just want five decimal places.

So what are we doing here? Well, we know that for sure you receive this number times the contract unit. How many contract units are there? Well, there’s just one contract unit. So what you’ll receive at the end of the three months in the long the futures position, you remember you’re buying this futures contract, someone’s taking the opposite position. They’re shorting this futures contract, and they have to deliver forty-three dollars at the end of the contract even though the price is 40 bucks presently. So in their rationale, it’s going to dip down by a significant amount in order for this to be an appealing contract. Now what is the forward futures price? So when we think about this, what are we really asking? This is the amount you’re committing to enter into the long position. And so we take the spot rate, we’re basically taking Excel and converting this formula into a nice smooth calculation. So we’re multiplying that by cell C23, which is the Euler number, and then we’re going to raise it. Right? Raising to the exponent R. So we’re going to have to do a bracket here. We’re going to do, um, probably have to do two brackets, actually, because we got to enclose the risk-free rate, close that, but then multiply it by time. Now time is a little tricky here because it’s always annualized. Very frequently, you’ll see that it’s annualized. So in this case, it is for sure. We’re going to do the C19, which is our three-month period, but we have to then annualize it. So that means dividing it by 12 to get 3 divided by 12 gives you 25 of the year or a quarter of the year or three months. And then we close that bracket. And then critically, to make this dynamic, so I can show you something cool, we want to make the contract unit included in the calculation.

I know it’s not in this formula here, but in order to illustrate the benefits of taking multiple contracts out at once, you get this multiplier benefit, and I’ll show you that in a sec. So what that ends up calculating out to is forty dollars and fifty cents. So in other words, this is the amount that you’re committing to the futures price today in order to participate in this contract. Now what’s the earnings then? So earnings is very basic. We’re going to say you receive 43 dollars from the short position folder, and you’re going to commit forty dollars and fifty cents today. So your benefit, your earnings, is two dollars and fifty cents in this case. Now let’s say, um, in this case, it’s such a nice opportunity, well, I probably want to really ratchet this up. And so suddenly when you increase the number of contracts, you really vastly increase the amount of earnings. So now it’s twenty-five thousand dollars roughly. If I add a couple extra zeros, we’re talking in the millions. Sorry, that’s too large for the. Just got to pop this out to show you what that, anyway, the point is money. You make it, you make a lot of money here. You know, 2.5 million.

Now, I want to actually make it a little more, um, realistic to again what this whole project is about is bonds. So let’s say the spot price is actually par, which is 100. And then we do the receiving. Let’s say it’s a par 7.5. So then this is more realistic to our bond market calculations. This is going to be relevant later on. And you can see that you’re gaining an earnings on that an expected return of 6.25 per bond that you have. Remember, bonds are calculated at the par, you know, typically a bond is denominated in a thousand dollars, but the, uh, the way we visualize it often is par is 100. And so we’ll talk about this a bit further along in the training course. So back to this slide, we’re just talking now about, okay, so this is a simplistic calculation.

Let’s get into the more detailed concepts around what I think we talked about earlier. In our earlier example, we had Trader A, Trader B, it was the carrying cost minus the convenience yield concept, which was a catch-all term for all the stuff around inflation, the risk-free rate of return, right? That’s in the formula cost and income received from holding the asset. Right? Storage costs, dividend costs. And remember, so the forward’s price is usually less than the spot price for beneficial assets, maybe like the financials like bonds and equity, although in my example above, I didn’t do that. I did the opposite. The forward rates are greater spot rates for burdensome, costly-to-hold assets like livestock, for example. That’s all in theory, right? In practice, in the real market, there’s all kinds of anomalies and behaviors that contravene this. But in essence, the cost of carry minus the convenience yield is what we’re going to talk about next. And there’s a couple formulas to understand. There’s the price for futures contract modified by the dividend yield for a given stock, right?

In the stock market, certain companies provide reliable dividends. It makes their company more attractive. They’re sort of their value plays, value stocks rather than growth stocks, which are, you know, don’t issue dividends but grow really fast relatively. Then there’s the concept as well as storage. So this is how you would calculate the storage costs. So you’re adding to the risk rate this storage cost calculation. And then also another one would be the actual currency futures factor, so relevant inflation factors.

And so this is negative in this case against the risk-free rate. And I’ll show you just quickly in Excel how this kind of works generally, but first I want to show the most important formula would probably have to be this convenience yield calculation, which as you can see, Euler’s number to the exponent of the risk-free rate annualized the storage cost minus the yield convenience yield times the time to deliver denoted in years gives us a good view of a convenience yield calculation. And I’m going to show in the spreadsheet in Excel a little more about this.

So, back to the Excel. We had the forty three dollars. We’re going to continue with that theme. I’m going to add some extra decimals here so we can see the same concept going forward.

I’m applying different formulas here below, so just for a quick view, dividend calculation. Here, the earnings are relative to this greater, so you get a financial benefit from entering into this contract that is that gives you more earnings, rather. And then look at the storage calculation.

So, here we’re taking the formula for the storage calculation and putting it into this format, and you can see that actually your earnings are diminished somewhat again because you’re taking the long position. Storage costs are calculated into it. You don’t get as much in today’s price for participating in this because of you have to pay a little more to enter into this contract because of the storage costs, and then the convenience yield.

Convenience yield

So, convenience yield is really important to understand. So, this is the formula for convenience yield. I haven’t built this, I don’t think correctly, have I? So, we’re taking in 30, which is the 40 box, 36, which is the older number, yep, and then C31 is again the risk-free rate, plus right, plus the storage cost, so storage cost is there, and then minus this convenience yield. Now, this is all made-up numbers, plugged-in numbers, and then times that by T. So, the point here, though, is that basically if we have F already, if we calculate this number, this is the number we’re provided, then we should be able to isolate the convenience yield. So often, convenience yield isn’t explicitly provided, it’s implied by what the cost of entering into the contract is. So, keep that in mind, and I’ll show you a little more about this.

So again, this is the formula for convenience yield calculation, and I want to hone in on this example of heating oil and why it’s kind of interesting here. It’s a classic example of what the convenience yield is. In winter months, there’s actually a benefit of not holding the Futures Contract but rather holding an inventory. This heating oil, obviously, there’s a cost to storage, but there’s this convenience benefit of having the heating oil in your possession, especially if it’s cold and you need it to heat your home or run your business. So, this benefit is really known as the convenience yield. Everyone who owns inventory has a choice between consumption today versus investment for the future. So, the rational investor will choose the outcome that’s best for them in the circumstances, whether they would actually use the thing that they have in the Futures Contract. They’re the one holding the asset, and they’ll deliver it at the end of the contract to the person taking the long position.

They can actually consume it and maybe replace and find more sources. But it’s important to understand that the convenience yield is that benefit to the person taking the short position who has the inventory in their possession. So yeah, we have the formulas here, we have the basic breakdowns. The key is important to understand that the Y is not easily provided. Textbooks won’t really easily provide and in real life, they’re not easily provided. You have to actually back out of the yield, the convenience yield, based on the other variables that you have numbers for. So in most cases, you’ll have, of course, forward Futures price today, what that entry cost is, and what the spot price is. And Euler’s number is always the same number. And then you’ve got these other inputs you’ll be able to typically back out and reverse engineer your way to finding out what the convenience yield is. But it’s never, understand this, it’s never explicitly provided in the real Marketplace. It’s implied through what these numbers provide in the marketplace, if that makes sense, hopefully. And so, let’s continue on now.

Futures prices converge towards the spot price

Let’s ratchet up the complexity a little more and talk about the Futures prices and how they converge to the spot price, the spot price being that now price whenever you are in the Continuum of time, basically. So, you’ve got your price on the left Y-axis and time and maturity on the X-axis. And what we’ll see here is your Futures prices, they are, in this case, above the spot price. And what happens is they converge at this point, at the point of maturity. They converge. And so, the one formula to know about is the value of the Futures Contract at Inception is zero. And it’s important to clarify here that we’re talking about value rather than price. But the value of a Futures Contract mid-stream through its life is calculated using this formula here. I’m not going to get into much detail at this point. I’ll touch on it later. But just as an FYI, and the key here is Basis, understanding Basis is going to be critical in Futures Trading.

So, Basis is actually the spot price at any point in time. Remember, spot, as I say, is the now price, right? At any point in the Continuum of time, it’s the spot price minus the Futures price at that similar point in time. So if the spot price is 10 and the Futures price is 15, then you’re going to have a negative number here as your basis, a negative basis. And if it’s a negative basis and decreasing with tenor, if it’s decreasing over time, then the market is, in fact, something called contango. And don’t worry, we’re going to get into more detail about it in a sec.

If the price, let’s say, of the spot price is 10 and this Futures line is actually all the way down here, then in this case, excuse the line going below the actual X-axis, but okay, in this case, the Futures price is eight, and the spot price is 10. Then it’s a positive basis. And if it’s a positive basis and increasing with tenor, the market is backwardation. So, we’re calculating this basis concept. That’s going to be key to understand in the future. And I think this is in Futures generally and in the future of this training program. But so this is one way to illustrate it, and I think it’s a useful one, and I want to make sure this is locked in because now we’re going to talk a little more about contango specifically.

So now we’re going to talk about the Futures curve, which is a snapshot of delivery dates, and in that context, we’ll then reference contango and we’ll get into detail about that as well. So, on the left, you’ve got prices, and then on the bottom, we have months for future delivery dates. And we’re going to use the example of oranges. If you’ve seen the movie Trading Places with Eddie Murphy and Dan Aykroyd, I highly recommend it. If you don’t see the whole movie, definitely watch on YouTube this the climactic scene where they engage in Orange Futures Trading. It’s very interesting, and it’s an ancient movie. You might say it’s from the 1980s, definitely before most of us were born, but anyway, it’s a great movie, and it provides some context.

So, what we’re talking about here, though, is the spot price of a pound of oranges. So everything’s measured in a given pound of oranges for this illustration. And we’ve got a spot price of 10 cents. Then we’ve got the settlement price that I can get on these Futures contracts. For a one-month future contract, I would pay 12 cents per pound. A two-month contract, 15 cents per pound. A three-month, maybe 16 and a half. A four-month, and then a five-month is 20 cents per pound. So what are you actually doing here? This is not saying that a month from now the market price is going to be 12 cents. No, no, no. The market price, the spot price, could be down here. It could just go over here. It could do that. It could be sort of shaping that way and sort of continuing that way. This is the Futures price, right?

And so, this, as you can see, is kind of a natural, normal upward-sloping curve. And this is what you would expect with commodities. If it wasn’t upward-sloping, I could sell now, and then I would push the price down correspondingly. And you shouldn’t really see downward-sloping Futures curves too often. But we will talk about that as well.

So, what’s happening here? This upward-sloping is the price of the assets in the future are higher than it is now. I can confirm that, right? It’s 10 cents, and it’s higher. This is known as contango. The further out you want the delivery, the further you’re going to be charged, the more you’re going to be charged. So typically, the price of an asset, the price is slightly above compared to the current now or spot price. So, I think it would help be helpful to imagine another context. What happens to the Futures curve? We know in the bond market, we talk about the yield curve, and when it moves, what happens?

When there’s an increased demand for oranges, let’s say, for example, that there’s a huge new government health subsidy that says you’ll get a tax rebate if you show the government receipts of how many oranges you bought per month or per year. Sounds kind of draconian and strange, but let’s just say that as the example, there’s a huge health subsidy, and you get taxed back. So suddenly, the demand for oranges is going to logically push up, including the spot price.

So, this Futures curve is going to suddenly push up too. If you want one month’s delivery with this new information entering the market about a government subsidy, now it’s almost 16 cents per pound, and then it goes up to almost 19 cents per pound. The whole curve moves up. And so, what we’re understanding is the whole curve moves up is naturally curved upward, and this is a contango circumstance.

And understand what’s really going on here. There’s this cost of carry concept in here, baked in here as well. And what we’re saying is, “I am prepared to sell you oranges in five months, but I’m going to be holding these oranges for this whole period, and the spot price is going to be probably down here during that whole period.” So, the Futures price is going to be higher than the spot price because I have to manage, take care of the oranges, spray them, all that inventory management. And I’m the short on this contract.

So, I should charge a little higher fee in benefit to myself because I’m taking on this additional risk. And so, this whole concept of contango, as well as backwardation, we’ll talk about too, arises, and it basically comes from an economist named John Maynard Keynes, who argued that, in general, the natural hedgers of a commodity are those who wish to sell the commodity in the future because they have it in their possession. They have to hedge that risk. Thus, hedgers are collectively holding a short position in the forward market. The other side of these contracts must then be speculators. They must, therefore, hold long positions, again. They want to get the oranges at a future date. And so, the hedgers are interested in reducing risk and thus will accept losing money on their forward contracts.

And so, he’s arguing, John Maynard Keynes, who’s pictured here, he’s arguing that speculators are holding a net long position, and it must be the case that the expected future spot rate, therefore, is going to be greater than the forward price. And it’s going to be greater than the spot price. Now, John Maynard Keynes has been very influential in economics and macroeconomics.

So, research him if you haven’t heard of him. Take a look at some of his other work. He’s quite fascinating, and he’s had a huge impact on how Western governments operate, even to this day, for better or worse. Now, it is typically in a contango environment the now price, the spot price, is cheaper, and the Futures price is more expensive. So, the spot market hits 10 cents per pound, and let’s say in a year’s time, and it’s 24 cents per pound. You could have ounces of gold, you know, 15 ounces of gold, and then 16 ounces of gold.

This is reasonable contango, what this might be referred to as. And so, there’s this opportunity cost, and the Futures contract, there’s the storage costs. And I guess the Futures contract makes sense as a result because you have these factors that are implied in the price. And contango reflects that, that Futures curve upward sloping contango reflects that. So, you might even see, for example, a surplus of oil and a shortage of oil. So, if there’s a surplus of oil at the start of the year, the spot price is 40 bucks a barrel. And then in a year’s time, though, there’s an expectation there will be a shortage of oil. So, that price is 140. This would be characterized as sort of more severe contango. It’s way more upward sloping. It would be more severe. And so, we’re anticipating in the Futures market some global catastrophe that would lead to this circumstance. But usually, it’s bearish because I would buy for 40 dollars a barrel and then sell for 140, pushing the curve downwards, as I mentioned already.

And I’ll mention here too again the basis. So, the basis was what we showed in the prior slide. It’s the gap between the future price and the spot price at any point along the time horizon of the contract. So, not the same thing as what this Futures curve shows, right? It’s a separate illustration we had as you, sorry, the Futures price up at the top and then the spot price. And if there’s another circumstance called backwardation, the Futures pressures are below and the spot price is in the middle. Don’t worry, we’re going to go through more examples.

So really quickly, here are the characteristics of contango. As we’ve discussed, the market in contango has future prices that are higher than the spot prices, and spot prices are the prices for taking delivery now. The upward sloping futures curve with longer data contracts carrying higher prices than shorter data contracts makes sense.

Now, yeah, the basis or the difference between the spot and the futures price is negative when it’s contango based on the way the formulas are formatted here, right? You’ve got your spot price minus future price. Then traders can take advantage of contango by buying near-term contracts and selling the long-term contracts, which are higher priced. Contango is usually seen in markets with abundant supply and strong demand presently, but uncertainty about the future.

Contango is caused by inflation expectation, future supply disruptions, and the carrying cost or cost of carry of the commodity. Sometimes I say convenience yield, that’s not what I mean. Convenience yield is a deduction, a benefit that the short position has. The cost of carry is the burden of having the short position because you’re holding the commodity. So other causes to talk about, definitely political instability, weather, crops. Weather is a big one, and that’s going to come up with our backwardation example. Also, don’t forget that sentiment traders and investors can change their minds about the market, and that is described in the contango shape of the futures curve, which again is a snapshot of delivery dates.

So picking up where we left off, we’re still talking about the futures curve, and we’re talking about, again, a snapshot of deliveries. But now let’s discuss backwardation. So it’s the same orange example, but note that the spot price is 30 cents, but then down into the future, it goes all the way to 16 cents per pound. So why would this be happening, and what’s going on here? Well, let’s say there’s a sudden crop failure in Florida. The orange groves are all frozen over, for example. So that might be one causal variable that would describe this situation.

Suddenly, crops are failing, and so there’s a real panic and a need for more supply, and there’s an expectation that there will be difficulty in getting new supply because a huge crop has just failed. And that’s, in fact, what happens in the film Trading Places, where they find out from a weather report it changes the futures curve dramatically. So right now, it’s quite expensive in this circumstance for oranges because the current price is 30 cents per pound. And that’s because the demand is way higher than the current supply. So people who do have an axe to grind, i.e., they have oranges in their inventory, will likely want to spot sell this right now and start delivering it. And that’ll start to push the price down.

So we’ve got your spot price again for delivery today, pay today, is 30 cents per pound. But five months later, it’s lower at 16 cents per pound. The futures contract, agreeing today to pay 16 cents per pound in five months’ time. And so this is an example of where we’re desperate now. There’s a shortage or crop that’s destroyed, and it’s not necessarily a good situation. The price is not going up across the curve into the future. The futures curve, in fact, is going to probably go downwards. And so this is generally speaking a hard-to-tell market whether it’s a good thing or not. But if the futures prices are less than that of the current spot price, then we know we’re in backwardation. And it’s quite rare, to be honest. So if you have oranges now, you sell them now, and then you would buy them back. You would sell them at 30 cents, and then you would buy a futures contract to get them back at 21 cents, and you would get the difference. And there’s an arbitrage opportunity here.

Then we’ll talk a bit more about that as well. But the futures, knowing the delivery prices are going to be lower than the cash you collect now, is what motivates selling in the spot circumstance and basically shorting now and then pocketing the difference in the future. And again, basis is the gap between what the spot price is now and the five months or wherever the futures contract delivery date is. And so here, it’s going to definitely be positive because, well, it’s going to be positive because the spot price minus the futures price is going to be positive in this case.

The characteristics of backwardation: the market is backwardation and characterized if the futures prices are lower than the spot price. There’s a downward sloping futures curve with short-dated contracts carrying higher prices than the longer-dated contracts. The basis or the difference between the spot and the futures price is positive, right? Because the spot was 30 and then the future was 16, so you would have a positive integer here because 30 minus 16 is a positive number. The traders may take advantage of backwardation by selling near-term contracts and buying long-term contracts. They may sell the spot, in fact, and then buy the long. Backwardation is often seen in markets where there is limited supply and weaker demand as well.

Now, just a further example of contango and using the orange analogy again. Let’s go back to this example we had, and we had the futures curve. Remember, this was the spot price, and then this was the price today in the market if you were to agree to buy oranges in one month’s time, two months’ time, five months’ time. And thus, this is a snapshot of futures prices here, and this is the spot price. And let’s say that suddenly oranges became hyper-popular for whatever reason. The whole curve would move up, including the spot price. And then the one-month futures contract would go up as well, correspondingly.

So you wouldn’t get a better deal typically in a contango environment. And so it’s really important to understand that this futures curve is not the spot price. This isn’t the spot price in two months. Just make sure you really like that. That’s not what this is. That’s not the spot price predicted that it’s going to go up five cents as the spot price. So I really want to show the price movements over time, and that’s what this chart will show. So here is the spot price over time. It goes from 10 cents, and maybe there are some issues, and it migrates up to maybe 12 or 11 cents over time, the actual spot price. And now we want to look at how does this interact with these futures prices.

So in the futures prices, you might have that two-month contract. It’s 15 cents per pound, and at initiation of the contract, it’s worth 15 cents per pound, but it migrates down to what price? It always migrates to the expiry date price, the maturity price, and that’s the spot price of roughly 10 cents here. Same thing with the five-month agreement, which was 20 cents per pound. So that migrates down over time as time proceeds, as you get closer to the maturity date. This line should probably be a little closer to here, but that’s all good. Basically, at the end of the fifth month, when you hit the fifth month, it will be the spot price. It will be the equivalent value. And this was that concept from earlier where it converges at maturity. And so that’s what’s really happening here.

So when people say things are in contango, the market is in contango, they’re usually saying the whole curve is upward sloping. So keep that in mind. And more correctly, referring to markets in contango is actually this movement downwards over time from the futures price to the maturity point. That is technically when you mean market is in contango. It’s moving downward, the price difference, the basis over time between the initiation of a contract and the contract’s expiry, it moves downwards. And this will be important later on. That’s why I’m bringing it up now.

So a further academic element to this is the expected price theory, which states in contango circumstances, there should be a significant price gap between the spot price and the futures price, the five-month price in particular. There’s a significant expected price gap. There’s an expected price theory, but there’s no way to know exactly what this should be because it’s a marketplace. And so the futures curve is dictated by what participants are willing to pay, what the cost of carry and the yield, convenience yield, is. For example, all these different factors will impact what this curve looks like.

Same concept with futures curves with backwardation. We have this example from earlier, the 31 cents per pound, and look at it diving down to 16 cents, and then the price movements over time. Let’s illustrate that. So you’ve got your spot price, and it’s relatively stable over time. So each one of these contracts, the 27 cents per pound, the 21 cents, they all migrate based on how far away they are from duration to this spot price at the top. So everything migrates closer to it. And these aren’t just stable lines. These are market lines.

So you could enter and exit a different futures contract, getting closer, closer, closer, closer. You could probably enter into it at any time here too, but you know it’d be so close to the spot price, why would you? But over here, you have a potential strategy around taking advantage of the situation. So this is all to say that the futures prices migrate towards the expiry and in bonds, it’s actually very similar. If there’s a discounted bond, it migrates towards maturity and hits par. If it’s a premium bond, the price migrates down to par as well. It’s kind of a beautiful system to describe what would efficiently make sense. You want to pay a spot price at the point of maturity.

So just like contango, backwardation, the expected price theory, normal backwardation would show that there is a significant discount to futures prices in the circumstance. We don’t know what that discount should be at the time, but it will be a significant discount. And then sometimes it’s referred to market as in backwardation when it’s downward sloping like this. But more accurately, what we’re really saying is the market is in backwardation where the prices are migrating upwards towards the spot price over time as they get closer to maturity.

I want to talk now about hedgers versus speculators. Hedgers basically buy or sell the physical commodity. They can be farmers, they can be manufacturers, they can be jet airline financial planners, the CFOs, Chief Financial Officers of an airline. There are risks that they’re concerned about. There’s the exchange rate risk, right? The actual currency’s value. There’s an interest rate risk, which is the cost of borrowing. And then there are the actual commodity prices that they’re concerned about. Speculators, on the other hand, do not have any skin in the game directly with the commodity in question. They’re playing the market, and they’re taking market risk for profit. And they’re providing price discovery inputs into the market as what they think helps distill the value of the thing that they are pricing at that very moment in time. And it’s a complex system that’s distilled into single price points.

The hedgers use futures contracts to manage and offset risk, to really hone in on this a bit further and use an example from a farmer’s perspective. So we have this farmer on the top right, a lovely lady who wants to offset a risk. She believes that the price of her wheat commodity, the wheat that she’s selling in the market, is going to actually fall down by the fall. So in the spring, she’s thinking the price is going to go down, and she wants to offset this risk. And so in the fall, as you can see, the price has dropped. So she would be down in terms of cash if she had to sell her wheat in the market at the end of the season.

So by taking a futures contract, she’s offsetting that risk, not perfectly, but very well. And then the opposite position might have been taken. So the inverse case, the price of wheat is lower, and the price at the end of the year is higher, and this farmer can offset and establish a price level well before the fall. So her skin doesn’t have to actually worry about this concern around what the price will actually be. So what kind of a hedger is this farmer? Well, long hedgers are concerned about rising commodity prices and are thus long the futures. Then the short hedgers are concerned about the falling prices and are short hedgers. So you get the cash offset for the wheat in either case. And so it’s very much a cash-based transaction, and there’s that novation process we talked about before.

The other groups of people who are involved in this are really these manufacturers, for example, technically called merchandisers, and they see the risk of a spread between the purchase and selling price of their product. We had the cereal example long ago now, where we were showing that the price of cereal, the consumer wants a stable price, but the manufacturer and the merchandiser, quote-unquote, is concerned about the fact that the price for corn fluctuates wildly while corn flakes are flat over the year. So profitability of a car manufacturer, let’s take that example now, it depends on the input cost of steel, aluminum, battery components, all of these pieces of the puzzle that get put into a car to create the final product, and their price fluctuations are happening just as well as the wheat farmers’ price fluctuations. So they’re also engaged in these cash and futures transaction setups to offset the risk. And it gets really interesting, too. Steel manufacturers, the price of steel will fluctuate, and demand for steel will change. And we’ll also show here the airline’s hedge jet fuel prices. I’m really excited to talk further about that particular example.

So we open up this section with a question: Why is Southwest Airlines so successful? And a lot of people have different hypotheses. There are no frills airlines, which means you don’t get a lot of fancy additional benefits the way that other major carriers in the US operate. High levels of customer satisfaction, there’s you know, you can cancel your reservation. Employee satisfaction is really good. There’s never been a very significant strike and there are 75,000 employees.

You can look at the history of how it started in the state of Texas in Dallas, Houston, San Antonio. They had at least three 747s. They were very edgy, and they had a love theme and their stock ticker is LUV. They had peanuts that you could have on the plane. Anyone with a peanut allergy would probably not like it, but most people don’t have peanut allergies. 13 planes. They now have 700 planes, so that makes them really good. They got same mechanics, same planes applied across their entire fleet. They do point to point. There’s no hubs. You don’t have to go through a hub city. Basically, they’re low prices, low fares really push the price down. So they have a fun image. All these different theories as to why is this airline so successful. Well, get prepared for the truth of the situation. One of the biggest causal factors, there’s no single one cause, but the thing that a lot of analysts tend to overlook is this: Southwest Airlines was an amazing hedger of jet fuel, and they did that through futures contracts. And it all starts with a guy named Kelly Gary Kelly, who joined Southwest in 1986, becomes the Chief Financial Officer and noted that the late 1970s strategy of jet fuel futures really makes a lot of sense. Post-Gulf War in 1991, Southwest dedicated 100% of its jet fuel needs in 2000 alone to futures contracts. They were so deeply hedged in this way that if they did something wrong, it would probably have unraveled quite badly, but they did it really well.

From 1998 to the summer of 2008, Southwest saved an estimated $3.5 billion versus the average jet fuel price paid around the industry. 83% of Southwest’s profits in that decade were from hedging mastery. And so Southwest Airlines invested in these oil futures by entering into these long positions, long fuel hedging contracts with a variety of oil producers. These contracts allowed Southwest to buy crude oil at a fixed price over a specified period of time, thus avoiding the volatility of the actual market. And the contracts also allowed Southwest to efficiently manage their fuel costs, protecting them from sudden increases in those fuel costs. Now, don’t get me wrong, I think other airlines definitely do this, but Southwest did it particularly well based on this performance. So we talk about barrels of oil as a really powerful futures contract. In fact, the Brent crude oil is very strongly correlative to the jet fuel futures contract, which I’ll talk about in a sec. The point, though, is that when you buy oil, the overall price of oil is impacted by these different sub-components and the demand for those sub-components. Jet fuel being a sub-component of a barrel of oil, about 8% of any barrel of oil is going to be refined into jet fuel. And just as a side note, I think this is just more interesting than anything. Chemistry-wise, this is what a gasoline compound looks like over here, and I’ll link to the description at the bottom where I got this screenshot from. But this basically shows that you take your crude oil and you can convert it and you heat it up and based on the molecular structure, the different types of oil are separated out in this chamber. This is called fractional distillation of crude oil process. So one of the elements is basically kerosene, and you can get into more nuance. There’s lots of great YouTube videos on jet fuel and the future of jet fuel. I highly recommend there’s one Google that one.

Future contract specifications

But the point is, what we’re going to talk about now is jet fuel a little bit more. There’s the futures contract specifications. We haven’t really touched too much on the details of it, but there’s a jet fuel futures called the Gulf Coast jet fuel Platts futures, and it’s on the CME, the Chicago Mercantile Exchange, the Chicago Board of Trade, and CME combined. So now they’re all under the CME Group in Chicago. And so one futures contract is 42,000 gallons, and on expiry, you have to deliver this oil within a 100-mile radius of Houston, Texas at the contract price. Unless you trade for cash, you settle in cash. And so you’re buying and selling these jet fuel futures contracts. You need to understand the representative reporting of these contracts, all this detailed stuff, how it’s the nomenclature, it’s the age. And so you have the underlying jet fuel, you have it in a huge portion. It gets delivered to Houston, Texas. It has a specific futures delivery date, all of this nuance. I’m not going to show in what we’re going to do next, which is an Excel spreadsheet.

So a great way to learn is to do things in Excel. And so the associated Excel spreadsheet has an example here of the Southwest Jet Fuel example, and I’ll just point out, though, we’re actually talking about Brent crude oil, which is a strong proxy for the jet fuel futures. They’re two different commodities, but the Brent crude oil is, you know, it’s a type of sweet crude oil while jet fuel is really referring to aviation turbine fuel, kerosene. There’s the US and then global versions, which freeze at different temperatures. Blah, blah, blah. This is just an example. Let’s go through this process. I’m going to ask you to calculate out a couple things. So you need to calculate the change per barrel daily PL. Now, if you remember, the PL was all about at the end of the day closing prices and then the total barrel daily PL. You’re going to need to also calculate the cumulative total per barrel total, and then the current account adjusting the margin payments before and after. These are all the different subset tasks in the Excel. And so the blue fields are the ones that you need to populate. So I’m going to let you dive in there, see what you can do with it, and then unpause the video, and I will go through it with you. So here we are.

We’ve got this Brent crude example. This airline is going to take a hedging position by going long because they believe the price is going to go up in the real market. And they’re going to enter into this contract in July, and then they’re going to need the actual underlying in September, end of September. And so this is the contract. I’ll call out NEDL, and I’ll link to the description there, the channel that helped build this model. This is largely based on their model. So I want to draw your attention first to the contract size in barrels as specified by the exchange, and then the value per point, which is also an important metric, or value per unit, which is another important metric to understand as well. So looking down here, we’ve got our dates into the future, and we’ve got our spot price. What is the spot price? It’s the current market price throughout this period. So all this data below indicates the actual prices, the spot market at the time.

Futures curves and contango

So we’re looking backwards in time. This is all historical data. This contract’s already been conducted. This contract is now finished, and we’re looking at it now, historical. So as you can see, it’s measured in USD per barrel. USD is the global reserve currency, so a lot of oil is determined in USD currency, even to this day and likely ongoing. Although there’s some debate about dedolarization. And a barrel is just, remember, it’s a measure of the volume of oil. It’s a container, basically. And then we have the futures price. And this is measured units per contract. So as you know, the contracts per barrel is static. Usually, the exchange sets it at a thousand, for example. And so this is a in the market price. And as you can see, it’s contango. It’s upward sloping. It’s higher than the spot price. So the first calculation you should do is the futures USD per barrel. Now, this contract is fairly simple because you’re sending the per unit contract to the futures contract. Then you have to multiply that by the value per point, and then we will set that static. And then divide by, oops, static. And then divide by the contract size in barrels. And this will get us, in this case, this exact amount here. This is trivial in this case, but in other contracts, it could be more complex.

I’m going to double click here, and it’ll go all the way down to the bottom. And you’ll note that all the fields appear the same across these. So now I also want to draw your attention to this. This is the end of September futures contract, and this is important. It’s the very last trading day of that month in 2023. That is the maturity date, and that fits the conventions on the exchange. We’ll even talk about that. Obviously, with bonds, it’ll be the same story. You have a window in which you can deliver the asset. So and typically, in this oil futures context, it is, in fact, at the end of the month that the contract expires. So with these commodities, you have to have one specified day of the month for the expiry. As I was just mentioning, bonds, you can have it across an entire month. But for what we’re doing right now, oil futures, you have a specific date in the month so that there’s not too much fragmentation. Everyone is landing on the same date for this very specific commodity. So this airline is taking a long position. They want specifically the number of barrels they want is 10,000. And so in the manufacturing or in the airline or the industry itself, in this case, they do want the physical oil, let’s say maybe. But they don’t actually have to take it. Again, they have a long position. They can actually settle in the financial sense, in the financial risks and cover their exposure to the change in price, as we’ve discussed before.

So while this is an airline, and yeah, sure, airlines need oil, they need specifically jet fuel, they don’t necessarily have to take the underlying at the end of the contract, as we’ve discussed before. In other words, they can settle in cash. In other words, they can settle in cash.

So again, they’re financially hedging their risk of this ever-changing price in actual oil forwards contracts. However, you might have a specific relationship with jet fuel manufacturers, oil producers at the Gulf Coast, etc., to actually get your true supply that supports your airline. Those are separate streams of effort. This is the specific financial stream of effort that we’re focused on. And of course, with futures, with forwards contracts, you can negotiate the specific date and time. It can be very flexible because it’s a contractual obligation that is not a tradable asset on an exchange. It’s not standardized. So now let’s answer the question on positions. Well, how many contracts do we actually need in this case? So I would go here and I would select, okay, we’ve got 10,000, and we want to calculate this out. It’s 10, the denominator is our actual contract size in barrels, and the position in barrels is our numerator. And that gets us, obviously, you can just see it’s 10 contracts for $10,000 of capital. You need 10 contract sizes to fulfill your obligation, to fulfill your request. So the contract value, in this case, we can calculate this by going simply taking our futures price at the start of the contract, again, the Monday.

So technically, I should change this to this number. So on Monday, July 31st, so we go contract value equals this number times our contract position, and I’ll get us our answer of $392,500. The other way we could do this also, though, is to go instead, we would take the unit per contract, times it by the number of contracts we have, and then times it by our point value. And that would get us the same answer. But let’s go with this one here to get our calculation. So now we’ll talk about initial margin. We’re now familiar with that and the margin call threshold. We’ve had, I’ve demonstrated what those were before. These are basically how the exchange makes sure this is a safe place to conduct these transactions and also avoids intentional default. “I’d like to get out of this contract, so I’m just going to walk away from the exchange and wipe my hands at this contract because I don’t like the way the contract is going. It’s not advantageous to me.” No, the exchange makes you cross their palms with capital, cross their palms with silver, is the proper expression, and say, “Okay, yeah, actually, I need to continue this contract, and I’m financially obligated to do so. I can’t just simply say, ‘Oh, I entered into this deal, and now I want to walk away.’ They’re financially obligated to participate through to the end because they have to put this capital down.

It protects the exchange, who is the one taking the actual risk because, remember, two counterparties, they don’t need to know each other at all in the futures market. And so this is a mechanism to protect them. So as I mentioned before, you can actually expect the exchange to change the initial margin percentage.

It can vary depending on the contract, depending on the circumstances. They can make these modifications. But here, as we can see, the initial margin I have to cross their palms with is $60,000. And we have this. And so our current contract value that we’re putting into this, so our initial margin as a percentage of the capital we have at stake is 15.29%. So I want to draw your attention to the process of how the price over time starts to narrow by the very end as you get very close to the settlement date. The futures price and the corresponding spot price really narrow and get back close together.

So we’ve talked about that before in the prior sections. So this shouldn’t be a surprise. This makes sense because now you know the period in which you are really making a gamble on the decision of what the price should be should be narrowing quite fast. So now, again, we’re in a long position. So in our circumstance, what do we want to have happen? Well, ideally, we want the actual spot price to go higher over time so that at the end of the contract, we get the oil at the price that we agreed to, the futures price, which is lower than the market price. If the market price goes up to, oh, so good, yeah, $45. It went from $37. Our futures price was $39.

So we open up this section with a question: Why is Southwest Airlines so successful? And a lot of people have different hypotheses. There are no frills airlines, which means you don’t get a lot of fancy additional benefits the way that other major carriers in the US operate. High levels of customer satisfaction, there’s you know, you can cancel your reservation. Employee satisfaction is really good. There’s never been a very significant strike and there are 75,000 employees. You can look at the history of how it started in the state of Texas in Dallas, Houston, San Antonio. They had at least three 747s. They were very edgy, and they had a love theme and their stock ticker is LUV. They had peanuts that you could have on the plane. Anyone with a peanut allergy would probably not like it, but most people don’t have peanut allergies. 13 planes. They now have 700 planes, so that makes them really good. They got same mechanics, same planes applied across their entire fleet. They do point to point. There’s no hubs. You don’t have to go through a hub city. Basically, they’re low prices, low fares really push the price down. So they have a fun image.

All these different theories as to why is this airline so successful. Well, get prepared for the truth of the situation. One of the biggest causal factors, there’s no single one cause, but the thing that a lot of analysts tend to overlook is this: Southwest Airlines was an amazing hedger of jet fuel, and they did that through futures contracts. And it all starts with a guy named Kelly Gary Kelly, who joined Southwest in 1986, becomes the Chief Financial Officer and noted that the late 1970s strategy of jet fuel futures really makes a lot of sense. Post-Gulf War in 1991, Southwest dedicated 100% of its jet fuel needs in 2000 alone to futures contracts. They were so deeply hedged in this way that if they did something wrong, it would probably have unraveled quite badly, but they did it really well. From 1998 to the summer of 2008, Southwest saved an estimated $3.5 billion versus the average jet fuel price paid around the industry. 83% of Southwest’s profits in that decade were from hedging mastery. And so Southwest Airlines invested in these oil futures by entering into these long positions, long fuel hedging contracts with a variety of oil producers. These contracts allowed Southwest to buy crude oil at a fixed price over a specified period of time, thus avoiding the volatility of the actual market. And the contracts also allowed Southwest to efficiently manage their fuel costs, protecting them from sudden increases in those fuel costs.

Now, don’t get me wrong, I think other airlines definitely do this, but Southwest did it particularly well based on this performance. So we talk about barrels of oil as a really powerful futures contract. In fact, the Brent crude oil is very strongly correlative to the jet fuel futures contract, which I’ll talk about in a sec. The point, though, is that when you buy oil, the overall price of oil is impacted by these different sub-components and the demand for those sub-components. Jet fuel being a sub-component of a barrel of oil, about 8% of any barrel of oil is going to be refined into jet fuel. And just as a side note, I think this is just more interesting than anything. Chemistry-wise, this is what a gasoline compound looks like over here, and I’ll link to the description at the bottom where I got this screenshot from. But this basically shows that you take your crude oil and you can convert it and you heat it up and based on the molecular structure, the different types of oil are separated out in this chamber. This is called fractional distillation of crude oil process. So one of the elements is basically kerosene, and you can get into more nuance. There’s lots of great YouTube videos on jet fuel and the future of jet fuel. I highly recommend there’s one Google that one.

Southwest example

But the point is, what we’re going to talk about now is jet fuel a little bit more. There’s the futures contract specifications. We haven’t really touched too much on the details of it, but there’s a jet fuel futures called the Gulf Coast jet fuel Platts futures, and it’s on the CME, the Chicago Mercantile Exchange, the Chicago Board of Trade, and CME combined. So now they’re all under the CME Group in Chicago. And so one futures contract is 42,000 gallons, and on expiry, you have to deliver this oil within a 100-mile radius of Houston, Texas at the contract price. Unless you trade for cash, you settle in cash.

And so you’re buying and selling these jet fuel futures contracts. You need to understand the representative reporting of these contracts, all this detailed stuff, how it’s the nomenclature, it’s the age. And so you have the underlying jet fuel, you have it in a huge portion. It gets delivered to Houston, Texas. It has a specific futures delivery date, all of this nuance. I’m not going to show in what we’re going to do next, which is an Excel spreadsheet. So a great way to learn is to do things in Excel. And so the associated Excel spreadsheet has an example here of the Southwest Jet Fuel example, and I’ll just point out, though, we’re actually talking about Brent crude oil, which is a strong proxy for the jet fuel futures. They’re two different commodities, but the Brent crude oil is, you know, it’s a type of sweet crude oil while jet fuel is really referring to aviation turbine fuel, kerosene. There’s the US and then global versions, which freeze at different temperatures. This is just an example.

Let’s go through this process. I’m going to ask you to calculate out a couple things. So you need to calculate the change per barrel daily PL. Now, if you remember, the PL was all about at the end of the day closing prices and then the total barrel daily PL. You’re going to need to also calculate the cumulative total per barrel total, and then the current account adjusting the margin payments before and after. These are all the different subset tasks in the Excel. And so the blue fields are the ones that you need to populate. So I’m going to let you dive in there, see what you can do with it, and then unpause the video, and I will go through it with you. So here we are. We’ve got this Brent crude example. This airline is going to take a hedging position by going long because they believe the price is going to go up in the real market. And they’re going to enter into this contract in July, and then they’re going to need the actual underlying in September, end of September. And so this is the contract. I’ll call out NEDL, and I’ll link to the description there, the channel that helped build this model. This is largely based on their model. So I want to draw your attention first to the contract size in barrels as specified by the exchange, and then the value per point, which is also an important metric, or value per unit, which is another important metric to understand as well. So looking down here, we’ve got our dates into the future, and we’ve got our spot price.

What is the spot price? It’s the current market price throughout this period. So all this data below indicates the actual prices, the spot market at the time. So we’re looking backwards in time. This is all historical data. This contract’s already been conducted. This contract is now finished, and we’re looking at it now, historical. So as you can see, it’s measured in USD per barrel. USD is the global reserve currency, so a lot of oil is determined in USD currency, even to this day and likely ongoing. Although there’s some debate about dedolarization. And a barrel is just, remember, it’s a measure of the volume of oil. It’s a container, basically. And then we have the futures price. And this is measured units per contract. So as you know, the contracts per barrel is static. Usually, the exchange sets it at a thousand, for example. And so this is a in the market price. And as you can see, it’s contango. It’s upward sloping. It’s higher than the spot price. So the first calculation you should do is the futures USD per barrel.

Now, this contract is fairly simple because you’re sending the per unit contract to the futures contract. Then you have to multiply that by the value per point, and then we will set that static. And then divide by, oops, static. And then divide by the contract size in barrels. And this will get us, in this case, this exact amount here. This is trivial in this case, but in other contracts, it could be more complex. I’m going to double click here, and it’ll go all the way down to the bottom. And you’ll note that all the fields appear the same across these. So now I also want to draw your attention to this. This is the end of September futures contract, and this is important. It’s the very last trading day of that month in 2023. That is the maturity date, and that fits the conventions on the exchange. We’ll even talk about that.

Obviously, with bonds, it’ll be the same story. You have a window in which you can deliver the asset. So and typically, in this oil futures context, it is, in fact, at the end of the month that the contract expires. So with these commodities, you have to have one specified day of the month for the expiry. As I was just mentioning, bonds, you can have it across an entire month. But for what we’re doing right now, oil futures, you have a specific date in the month so that there’s not too much fragmentation. Everyone is landing on the same date for this very specific commodity. So this airline is taking a long position. They want specifically the number of barrels they want is 10,000. And so in the manufacturing or in the airline or the industry itself, in this case, they do want the physical oil, let’s say maybe. But they don’t actually have to take it. Again, they have a long position. They can actually settle in the financial sense, in the financial risks and cover their exposure to the change in price, as we’ve discussed before. So while this is an airline, and yeah, sure, airlines need oil, they need specifically jet fuel, they don’t necessarily have to take the underlying at the end of the contract, as we’ve discussed before. In other words, they can settle in cash. In other words, they can settle in cash. So again, they’re financially hedging their risk of this ever-changing price in actual oil forwards contracts.

However, you might have a specific relationship with jet fuel manufacturers, oil producers at the Gulf Coast, etc., to actually get your true supply that supports your airline. Those are separate streams of effort. This is the specific financial stream of effort that we’re focused on. And of course, with futures, with forwards contracts, you can negotiate the specific date and time. It can be very flexible because it’s a contractual obligation that is not a tradable asset on an exchange. It’s not standardized. So now let’s answer the question on positions. Well, how many contracts do we actually need in this case? So I would go here and I would select, okay, we’ve got 10,000, and we want to calculate this out. It’s 10, the denominator is our actual contract size in barrels, and the position in barrels is our numerator.

And that gets us, obviously, you can just see it’s 10 contracts for $10,000 of capital. You need 10 contract sizes to fulfill your obligation, to fulfill your request. So the contract value, in this case, we can calculate this by going simply taking our futures price at the start of the contract, again, the Monday. So technically, I should change this to this number. So on Monday, July 31st, so we go contract value equals this number times our contract position, and I’ll get us our answer of $392,500. The other way we could do this also, though, is to go instead, we would take the unit per contract, times it by the number of contracts we have, and then times it by our point value. And that would get us the same answer.

But let’s go with this one here to get our calculation. So now we’ll talk about initial margin. We’re now familiar with that and the margin call threshold. We’ve had, I’ve demonstrated what those were before. These are basically how the exchange makes sure this is a safe place to conduct these transactions and also avoids intentional default. “I’d like to get out of this contract, so I’m just going to walk away from the exchange and wipe my hands at this contract because I don’t like the way the contract is going. It’s not advantageous to me.” No, the exchange makes you cross their palms with capital, cross their palms with silver, is the proper expression, and say, “Okay, yeah, actually, I need to continue this contract, and I’m financially obligated to do so. I can’t just simply say, ‘Oh, I entered into this deal, and now I want to walk away.’ They’re financially obligated to participate through to the end because they have to put this capital down. It protects the exchange, who is the one taking the actual risk because, remember, two counterparties, they don’t need to know each other at all in the futures market. And so this is a mechanism to protect them. So as I mentioned before, you can actually expect the exchange to change the initial margin percentage. It can vary depending on the contract, depending on the circumstances.

They can make these modifications. But here, as we can see, the initial margin I have to cross their palms with is $60,000. And we have this. And so our current contract value that we’re putting into this, so our initial margin as a percentage of the capital we have at stake is 15.29%. So I want to draw your attention to the process of how the price over time starts to narrow by the very end as you get very close to the settlement date. The futures price and the corresponding spot price really narrow and get back close together. So we’ve talked about that before in the prior sections. So this shouldn’t be a surprise.

This makes sense because now you know the period in which you are really making a gamble on the decision of what the price should be should be narrowing quite fast. So now, again, we’re in a long position. So in our circumstance, what do we want to have happen? Well, ideally, we want the actual spot price to go higher over time so that at the end of the contract, we get the oil at the price that we agreed to, the futures price, which is lower than the market price. If the market price goes up to, oh, so good, yeah, $45. It went from $37. Our futures price was $39.

So we’ve made a little bit of a profit here and we’ll show how that works in a sec, but just to point out what the whole purpose is again. Now we want to do the daily P&L, so to get the per barrel calculation, we’re going to take a look at the change, the daily change, right? Because this is a mark-to-market, we take this number, then we minus our initial transaction price that we agreed to. So in this case, we’re probably not too happy because we basically could have entered into the contract a day later, and we would have got a better deal because our futures price is lower a day later and the actual spot price is lower correspondingly. So that all makes sense.

The key though is we want to take a look at it over the whole period of the transaction, and then to calculate the total daily, we want to take this number and then multiply it by our ten thousand dollar or ten thousand position, the number that we need to get a calculation out of this. We get that number. One thing I should have done is I should keep this static, so I just press F4 that keeps that static and then it’ll draw down and I’ll take a look at where we are.

So I’d be kind of nervous now because we’re kind of in the negative territory quite a bit. You might not sleep too well every night, and that’s one of the risks in the financial market. You can either eat well or sleep well, and we’re trying to eat well here, and we might not be able to. It looks like because look how much we’re losing on a daily, relative basis. So the key here too is this is calculating the incremental profit or loss on a daily basis, and some days are good, some days are bad. So now if we want to get the cumulative P&L, we need to tag this against this number. So equal this price, but we need to base it against what we’re actually going to pay at the end of the contract. We want to peg it against the original price that we’re committed to, and we press F4 to lock that in, and this is going to give us not the P&L daily, it’s going to give us our P&L cumulative, which we really care about. So double click here and it goes all the way down. So with the cumulative payoff, you’re seeing a different story from what I would have been panicking about if I was worried about this on a daily basis, right? So now you start to see a cumulative structure, and by the end, it’s a different story from where I was concerned on a daily basis.

All these fluctuations, this wild volatility, is what we’re trying to control against. We’re trying to hedge against. So now we also want to get the total, and we do the same process, as you can imagine, just like here. The total, we set the per barrel times our commitment that we’re putting in financially, and we get this number. And then add a cumulative rate, we get that number as well. So suddenly, at the very end, we have a different story, and we end up winning a significant amount of money here, sixty-two thousand dollars. And that’s not too surprising because the end price of the contract ends up being quite a lot higher than what we committed to, and we are going to get the set amount of oil at this price rather than these prices here or this specific price. So as a result, the difference is our payoff. So now, at the top of the screen, we have contract payoff in USD.

We know that it will be this cell down here. That’s the quick and easy way to do it after we did all this work. Another way to do this, though, is to compare the end price of our futures contract minus our original price that we entered into. And then we multiply that by, of course, our ten years, and we get the same answer. By getting, by virtue of getting the same answer, we know that these are now whole. We’re getting the right mathematical process in place. So now let’s talk about margin payments and initial margin. We understand that you put this sixty thousand dollar commitment in place in order to enter into this contract so that there are fewer strategic defaults, i.e., where someone enters into a contract and says, “Oh well, I have no margin payment required, and I’ll just go and buy this spot and just wipe my hands of this contract.” So these cheating people, the people who are, I guess, dishonorable when they enter into a contract, that’s all netted away.

That’s all just not possible because, and what makes the exchange so powerful is as a solution, they create a compensation mechanism using these margin payments to ensure that counterparties would never consider walking away without fulfilling their obligation. It binds the two counterparties who never meet each other and are matched, as we discussed, in a forward and futures contract setting. And so for our current account adjusted by mark-to-market, in the first field, this was sort of a trick question. We don’t actually have any current account adjustment to be made because it’s the first day of the transaction. But the margin payment, for sure, is going to be sixty. And then our current account after margin payments, this is simply a combination of this number plus this number that gives us our sixty thousand is the current account after margin payments. So now it’s day two, and we want to get this mark-to-market calculation, which is the adjustment to the nominal amount based on the incremental gains or losses on that given day, as we showed before. So in this case, we need to do a simple calculation here. We set this number here pinned as the end of the day calculation, and then we need to take our P&L daily total and add that together. And now we see we’re down 5000, which makes sense. But remember, margin payment is still the sixty thousand.

This is a nominal tracking process. We don’t actually take five thousand dollars out of your account. So now margin payment, so the exchange will politely ask you if you get too close to the margin call threshold to politely ante up and add a little more into your account, and that is to ensure that your nominal amount of your account is back up to your original margin. So now we want to test if we are near the margin call. So we would do, if this number is less than this number, then we would calculate out this number minus this number is what we would top it up to. We have to top it up back to our sixty, sorry actually, we’ll put it up here because this is static. By this number, and if otherwise, the margin account is zero. Now we also want to make sure this is static, that it locks into C14 in all circumstances, and this locks into C14 in all circumstances. And then finally, we use the same process we did before, which is this plus this calculates out our current account. So we haven’t broken this margin call yet, and so the exchange will let us roam free in the circumstance. But let’s apply this across all the remaining cells in the story to see if there was any requirement for a margin call. And so, as you can see, we’re constantly marking our account to make sure we are in a good spot. And here we have an unfortunate situation right off the bat the next day. We had a major cumulative loss now of 22,700, which pushes us way below the 45,000 threshold. So, in fact, we have been margin called here on this day because we have dropped past the 45,000 threshold, nominal current account adjusted mark-to-market. We’ve dropped quite substantially, and in order to continue to participate, you actually have to punch yourself back up to the 60,000 mark, and that’s what we’ve done here.

If you didn’t do that, then they would confiscate your capital as is, and the exchange would wipe their hands of you, rather than anything else. And usually, margin calls are triggered and administered by your broker, not the actual exchange. The middle person between you and the exchange is the one that manages the margin payments, especially in the retail futures examples’ context. There might be different arrangements depending on, I think Southwest might have a different arrangement, for example. But if you look at this going forward, let’s say we had another period. I just played around with this number. It used to be 37.94. Everything’s going dandy, and your futures contract is actually increasing in value. The futures contract, by the end, $45, you entered in at $39. So overall, you get compensated $39 for the barrels of oil, but the price in the spot market is $45, and the spot market price particularly is $45.16. So you’re happy because you took a long position. But in certain points of the journey, you aren’t sleeping well, particularly if we just do this example here where the price goes down. Let’s just change the number just to illustrate. Okay, now you have to do a margin call. You’re margin called, and you need to pony up $42,400 just to get back in the game. So put this back up, simulated, these are all simulated prices. If it was $31.94, you actually have to pony up big time if the price goes quite haywire. And this would be kind of a systematic price. Maybe the price down here wouldn’t be realistic going forward anyway if it went to $30.32.94.

And in fact, the spot price might have adjusted dramatically. Like, I don’t think that circumstance too often, but it can occur in systems of high volatility that, “Oh, wow, you keep on striking past your margin call, and you need to pony up to participate and continue to participate in the transaction.” So those are significant risks that you take on if you enter into these futures contracts, and that’s something to be aware of. But at the end of the day, this is a happy story because, again, you got $45 worth of the barrels you asked for, but you’re paying $39 worth of barrel. So your net victory here is sixty-two thousand dollars, and you committed almost four hundred thousand dollars to make sixty-two thousand. So now we want to calculate the number of margin calls. So what we would do here is we would highlight this cell, do equals, and this is definitely something you would use a lot called count if. Count if enables you to basically create a viable way of tackling a range. You do shift control all the way to the bottom, press the down arrow, that populates all these fields. You don’t need the margin payments. We’re only interested in the number of margin calls. And very simply, just do ending of the bracket. Sorry, you don’t do any of the bracket. You have to do a quote, greater than zero, is what the criteria is.

And that’ll tell you what the margin call is. I don’t think we need a bracket here, so make sure you get that. And then, boom, now you have one. So if I were to add an additional margin call, let’s say we did 32, you would get two margin calls. And this will come up in a sec later. We’ll talk about why that’s a big deal. Margin payment. So margin payment is the sum, how much money did you have to put in to continue to play, but to start off as well. So Ctrl+Shift again, down arrow highlights the entire field, and then we close the bracket. That gives us our total. Now we do our account current account status. That’s actually going to just simply be this number here, and we can press enter. That tells us the total. Now contract payoff. We already have the contract payoff, right?

We calculated it this way. We took the ending price minus the starting price times our position and number of barrels. That gave us our total of 62,000. Here, all we actually have to do is take this minus this, and if this number is correct, then we know our math all adds up. 62,000. So there we have it. Now understanding more broadly the great financial crisis and a lot of financial crises happen when we don’t have enough money to back these margin calls. So imagine if it wasn’t just one, it was, you know, 10 different margin calls or the giantness of this margin call, like, “Oh, I have to pony up so much to continue to participate.” I mean, this would be wildly… Like, the spot price would have to have dropped massively as well for this to occur.

But in a complex system with all these other futures contracts going at the same time, there would be massive panic around having to do this one margin call if there were a lot of margin calls and there isn’t enough liquidity, i.e., enough cash in other accounts, you know, or we’d have to borrow from… We’d have to sell other securities to get the margin call capital together to cover the margin call capital. And you have to do that really fast. Then you really enter into a crisis mode, especially if more and more and more people are impacted by, “Oh, he took or she took their money out of bonds or they took them out of equities to cover these margin calls.” Then you start to have a more system-wide impact. So the… There are a lot of risks with futures. So let’s go and continue our study here. Now I want to do an example from a short position. Provide a little context. We’ve already talked about this before. Basically, Phoenicians and the Greek traders carried their goods for sale around the new world. We had the Dodoma Exchange, and then we had the Chicago Board of Trade, which through rail routes from the north and Canada and the Prairie and grain-producing states went and put their materials in Chicago for exchange. And then once you got to Chicago, it’s really easy via waterways to go up to the St. Lawrence River, St. Louis at Seaway, through Montreal, for example, and then down the Mississippi River to get to the Gulf of Mexico to trade globally these goods.

Wheat pool example

And so, of course, with agriculture, there’s seasonality. We’ve already discussed the supply and demand. There are huge gluts and then sudden shortages that lead to chaotic prices if you don’t stabilize things through a futures model. And so naturally, clearing grain exchange was a key innovation in the United States in the 18th century, and that’s built on the concepts around managing the risk, having transparency, liquidity, price discovery. Everyone generally knows what the price of these things are and the general security through the margin process. You have to ante up if you are a participant. So that stabilizes the risk of default. And so all of this system is really exciting. Grain is a great example.

And so, I want to talk about this example of grain and use the wheat pool. The wheat pool was an association of Canadian grain farmers formed in the early 20th century, 1920, to ensure a stable price and reliable market for their wheat in the face of unstable and often disastrous fluctuations in prices and agricultural commodities. The wheat pool would buy directly from the members and turn and sell and deliver to the markets. So, the wheat pool was later organized into the Saskatchewan wheat pool in the late 1930s, and it existed until I think 2013 when it merged with another source, Agricore United, to form Vitara.

But just as a general example, wheat as a commodity, we know the underlying is wheat here, the contract size is 5,000 bushels. I’ve got this example here, the blue fields should be populated. See if you can pull this off. It’s gonna… I’m gonna ask you to do the same things we did in the prior section, which is change in bushel daily P&L. We need to know that, we need to know the total bushel daily P&L, then the cumulative total per bushel, and then the current account adjusting the margin payments before and after. So now that we’ve done the jet fuel example, or sorry, the Brent crude example, let’s go in here and complete this example.

I think this time you’ll have an easier time since we’ve gone through an example to answer these questions. Unpause the video when you’re ready, and I’ll walk through it with you. So here, we’re going to walk in the shoes of the Saskatchewan wheat pool. They have this commodity, the underlying wheat bushels are 5,000. That’s a convention that dates way back. The value per point is set to 50, and we start date in September, end of the harvest season in Saskatchewan, and then maturity December, mid-December.

And as I said before, fixed income, there’s actually a whole month window. Some commodities have a specific date, so there’s no fragmentation of the market. You have to land on the date, and this one is mid-December. Now we’re taking a short position. So if we’re taking a short position, we have wheat in our possession and we are putting it in the market, and we expect the price to go down. In this hedge that we’re taking, we’re saying that if the price goes down, then we get a cash benefit. We’re taking a position of seventy thousand bushels. So we’ll note here the spot price for the commodity per bushel is 475. Now we’ve got units per contract. This isn’t really convertible too easily, it seems initially, but what we have to do is we take this current Futures price of 598, then we multiply it by the points value per point, and then we divide that by 5000, and that converts it into a comparable measurement to a per bushel rate. Because remember, a unit in the contract units is 5,000 bushels, and this is just representing one bushel.

So we have to bring this number down to its equivalent per bushel measure. And in order to make this work even better, I have to do F4 here and F4 here, so those fields are static. And then I’ll scroll down here, and it will provide the prices alongside the spot prices throughout the entire period. And you’ll see here below there’s a significant gap between the spot and Futures price, and it arguably will be higher in the wheat commodity sector than oil because oil can be packed in very efficiently. It is a liquid form, so it gravity pushes it down perfectly, whereas wheat is kind of bunchy, and bushels are a measure, but they take up air.

You can actually end up shipping quite a lot of empty space in the process of shipping or during wheat. So there can be some inefficiencies there, although I’ve seen grain actually in its unrefined form. I was going to say which is flour, but in a grain form, and it does it is fairly efficient. There is going to be a gap between the Futures price and the spot price to reflect the storage costs and then also some convenience yield calculated in there to offset the storage costs. So now let’s talk about what we’re trying to do as the wheat pool. We are saying we’re going to harvest 70,000 bushels. And so we need to get the position of the contracts because we’re hedging those bushels in the market. In exchange, we’re going to get cash. So we’re going to take this number, 70,000, and divide it by the contract size bushels, the number of bushels, which is 5,000, and that gives us a position of 14 contracts in this situation. Now, to get the actual contract value, we would take the number of contracts times it by the position that we’re taking in terms of bushels, and then we would multiply that by the value per point. And that’ll give us 369,600 dollars.

Another way to calculate this, which would be just as equally effective, is to take the Futures value per bushel that we’re entering into, and then the total position in the number of bushels we are trading, and that gives us the same answer. So that means we’re making a lot of sense. The initial margin in percentage terms, this is basically asking us to take the 60,000 and divide it by our contract value, and that gives us the 16.23 percent. Now, margins are usually a little lower than this, I will say, but that’s okay. It’s usually between three and fifteen percent.

It can vary, depends on what the exchange is saying at the moment in terms of the risk of the underlying. Well, to get the P&L daily for a purpose bushel analysis, because we’re in the short position, we care about the calculation of this number, which is the second day minus the initial entry point. So here, we’re actually not doing well because we’re gaining 12 cents on this. If we’re in a short position, we ideally want to see the prices going down, as we’ve discussed multiple times before. And to get the total P&L per day, we would multiply that by 7,000, and we get 8,575. So, I realized I did something wrong here. The price has gone up, but that’s not good, and we want to reflect the short in a positive light. So, we want to invert the polarity here. So we’re losing 12 cents in that case. And then our totals.

Now, what happened here? I failed to pin this down permanently. That’s an F4 function that’ll peg it so that it’s always this field that’s being pulled and then do this again. Then we have a better reflection of what’s going on.

Now, if we want to get the cumulative total, we have to peg against our initial position that we take. Make that an F4 and then minus by this field so that as it goes down, it will cumulatively calculate it. And then do the same calculation here as we did before, multiply that by the 70, make sure that 70 is pegged, and then we get the numbers cumulatively over the period.

So, as you can see, actually by the end of the contract, the price has risen quite a lot. Remember, the number is 5.94, and we entered into the contract at 5.28. If this was a long position, I’d be thrilled. If this is a short position, which it is, it’s not a good situation. We’ve actually lost money on this one.

Now let’s do account adjust. It’s not a big deal because we are a wheat producer and we have to honor this contract. But you win some and you lose some. So the current account position is going to start off at zero, and we’re going to post our initial margin, which is the 60,000, just to play the game. And then we will sum these two and 60, and that’ll give us our calculation, our current account after margin payments for the given day.

So, on the first day, we did have to post the 60,000 to participate. Knowing the outcome, we probably wouldn’t enter this contract. But we didn’t know the outcome when we started this contract, of course. So now this is where it gets interesting. Once again, we have to take the total here and then multiply it by whatever is in this field, which is P&L. It looks like we’ve lost some money here, so we’re now down. Fortunately, the threshold is forty thousand, so not a huge deal yet.

So, as we said before, you have to set up an if statement. If this cell is less than the Margin Call threshold, which was forty thousand, and we pegged this permanently by doing F4, then we have to top up by the difference between this number, which is obviously 60, minus this field we already selected here, minus this field. And if it’s not, then there’s no action to be taken, and there’s no need to bring up more funds to participate.

So the math here says, “Oh, we don’t actually need to do anything there.” This again is just this number plus this number. And so, at the end of the second day, we are now, in nominal terms, 51,425. So we’re already losing a little bit on this contract.

Now we’re going to take this and deploy across all the fields into the future to get a taste for what has happened to us. And it looks like we had two margin calls early on in the process where the price did drop pretty significantly. And now these margin calls then necessitate us to pony up, as I’ve said before. And if we don’t, then we lose our position entirely. And so here we did it twice in a row on these two particular days where there were significant gains in the price. The price went up even further.

The Exchange would be worried that we would cut the deal, stop, no longer want to fulfill our futures commitment in this short position we’ve taken, and just go in the spot market and sell the actual commodity that we already have. Right? We have the wheat. We could just go in them and instead of allocating that seventy thousand for this Futures Contract, take that money and just sell it in the market and make a profit. Now, well, they block that by ensuring that you have to participate here, or else you lose your 60,000 initial commitment.

So, as you can see here, we had two margin calls, but otherwise, we’re good. So let’s do a contract payoff, which is easily done here. The contract payoff is going to be 45,000. We lost forty-five thousand dollars here. And we’re going to do the countif function again, which was really useful last time because what it does is we highlight the range. Two ways to do this. I would take actually shift and control and down arrow. And then we would go comma and then quote greater than zero. Note the comment and then note the incident.

And there are two incidents of that nature. Then to get the margin payments total investment that we had to make, we would go here Ctrl shift and down to collect all the fields. And you can see here’s a hundred thousand margin payments in total. There was 60 to start. Here we populate the current account, what the actual end total is of our current account, which is slightly north of what we initially put in. And as you can see, there’s a significant disparity. If I go this number minus this number, it should equal the contract payoff amount as well. And it is.

So therefore, all our math ends up adding up here. And in this story, it’s not a happy one because we did lose 45,000. Well, forty-six thousand dollars in effect in this transaction because, again, we took a short position and the price actually went up. And we’re a little disappointed, but not a big deal. This is one of many wheat pool hedging contracts, and it’s quite a challenging field to be in, agriculture generally. So that’s it for this section. And let’s carry on.

Now let’s outline some additional concepts that exchanges have in place to support their market. So price limits is a concept where there’s an allowable range of price movements in the futures products in each trading session. And on the y-axis, we have ticks or points. On the x-axis, we have time. So during a trading day, if the price or the ticks go down below a certain limit, which is known as the limit down, then trading will either halt or stop for the trading day. Conversely, if they go too high, they will also stop, halt, and for the entire trading day.

And this is the regulations that determine that specific outcome. In the equity indexes, there are three levels of expansion on the limit down: seven percent limit down, thirteen percent limit down, and twenty percent limit down. And then on the upside, there’s overnight a five percent limit up and five percent limit down. The point is this exchange has another layer of protection against massive volatility where there are margin calls and people have to generate more capital to stay in their futures contracts. The exchange also has this system to say, “Whoa, whoa, whoa, let’s pump the brakes. There’s something wild going on in the market, and we need to halt trading at this time until we figure out what’s going on in terms of the actual market behavior.” And this is known as the price limit range, and this range is adjusted and calculated daily and updated so that the exchange follows where the market is going. If the market is generally going up or the market’s going down, this range moves up and down with that. So there’s another level too, and it’s called price banding, and that’s around the bid-ask spread, well the spread and the prices.

So this is the spread, you know, 104 and 105, there’s a spread of one. But in this illustration, the actual banding though is the actual maximum price that you would pay and the lowest possible price in that range. And if it goes beyond that range and your bids or your asks aren’t fulfilled if you are outside of this range, now if that range moves up and you have a resting order, then it will be triggered, and you will have the opportunity to transact. And so that’s a good two dates you can set or good to cancel. But over the last few years, the markets have very few limit ups and downs. But it’s important to be aware of these pricing rules in the marketplace.

Open interest

So another really important concept to understand is open interest. And open interest, very simply, is the total number of futures contracts held by market participants at the end of a given trading session or trading day. If you remember earlier on when we looked at Trader A and B and how that could expand to thousands of traders through the support of an exchange, instead of interacting one to one with each other, you could interact with a wider group of people.

Suddenly, we’re really talking now with open interest about an indicated market liquidity and critical mass. The number of contracts out there indicates how popular this particular futures contract is. Large open interest is usually indicative of a lot of market participants. So you would have institutions, hedge funds, retail investors, and arbitrages, etc., all participating. When you have a lot of contracts out there, open interest is also an indication used by futures traders to determine market sentiment and strength behind price trends.

So unlike the stable supply in this case of this Government of Canada Bond, the futures contracts can vary widely, expand and contract based on sentiments and based on where people are in the market. And so because of that dynamic supply, you have quite a different way of looking at it, and you can actually expand the scope of this Government of Canada Bond’s impact on the broader market because you can have bets on that underline. That’s why open interest is an important concept to understand too. It’s showing that dynamics apply. If I were to basically hammer out, you know, key tenets of what an open interest is, it increases when traders open trades, and it decreases when traders close trades. Again, it’s an indicator of cash flowing in and out of a market. So you can see if the futures contract for a Government of Canada Bond is declining in its open interest, then you’re seeing capital is leaving the futures relating to Government of Canada Bonds and moving somewhere else. And what does that indicate? What sentiments can we draw from that information? And the key too is that it’s a running total of all open positions in the futures contract, and it has to be made public. So it’s very useful for people.

So, citing this from Bionic Turtle (a link in the description), I’m going to show you using Excel how open interest works. We’re going to use the example of wheat futures. A bushel, 5000 bushels, is one contract of wheat futures. So, Alan here decided he wanted to do 300 contracts, and this is the long position. So, at the end, he’s going to deliver cash in exchange. He’ll get wheat, and someone is going to take the short position on that one. So, um, that, by the way, 1.5 million bushels of wheat, a lot of wheat. Bob is going to take the opposite position; he’s going to take the short. And so now these 300 contracts work together, and we’re even Stevens. There’s a match. And so you might even say this is a forward contract because Allen and Bob could just meet up and say, “You know, I have 1.5 million bushels of wheat,” Bob says, “and Alan says, ‘I have the corresponding amount of cash, and let’s do a deal in a forwards contract sense.'” But we’re going to put it into an exchange and futures context now, right, where they are actually contracted with the exchange itself.

Alan has a contract with the exchange, Bob has a contract with the exchange. The exchange novates these contracts, nullifies them, and then we’re only playing in the realm of the cash difference between the two contracts. But the exchange manages this whole process. The exchange is the counterparty, so that they aren’t taking on the risk of a forward contract where Alan could leave the country and not fulfill his obligation, Bob vice versa. The contracts are highly standardized so that an exchange can manage the risk and ensure that there’s security around who has what position in the contracts, and they can’t run away or not fulfill their obligation.

I will mention here too that there’s matching perfectly one-to-one here, or 300 to 300 here, but if there is a mismatch, if there are more long positions than short positions, what will actually happen is the price will adjust in the marketplace to make it more attractive for someone to take the short position. So, that’s an additional layer of nuance that we’re going to explore further, but right now let’s focus on open interest.

So, then also what we’re seeing here is the open interest calculation on the row J. So here it’s 300 total, not 300 plus 300. This is the total number of contracts in the market, 300, and this basically illustrates that this is a very tiny microscopic market, and there’s something wrong with this market with so few participants and so little open interest. Obviously, this is just illustrative purposes here. So, Christine opens a position of, let’s say, 250, and Dawn opens up the position of 250 as well, so short and longs are balanced out. So, note how the open interest has increased to 550. Now we have Alan taking an offsetting position on the long position. He took the Excel doesn’t quite work perfectly here because this is going to be negative 300, but what this really is is a short position he’s taken, and that nullifies his long position. So, he’s offset and closed out his contract, and that’s how you do that by basically taking the opposite position to close it up. And so someone else has to take the corresponding because this is a contract, someone has to take that additional position, and it’s Eric. He’s going to take the 300 contract himself. And now you see open interest is still even keel between longs and shorts.

So, then further to it, Christine takes another position here. Christine is offsetting or closing out part of the position by doing 125, and then Frank is going to randomly also select to enter a long position of 125, which is nice and convenient for this illustration, but the total remains 550 as a result of these transactions. So now Eric wants to offset half of his 300 long position, so he goes negative 150, and Bob decides to enter into the same, wants to go long 150 to semi-offset his existing position of which was the short of 300 at the very start. So, as you can see, the open interest reduces again because people are now withdrawing from the market. So, the market here in an open interest calculation will reflect the total number of active contracts in the marketplace rather than the total volume, which is another way I’ll show you in a sec.

So, then finally, we also have Barb is still has 150 out and wants to close that position. So, we’ll take a further long position to cancel out the short, and then Eric will do the corresponding opposite. And so, the ending total of open interest is 250 on the end of this trading day. So, Don still has 250 short, Christine still has 125 long, and so does Frank. And so, open interest and volume are very similar, but the key differences are that volume increases every time a trade occurs, and it’s also a running total of all transactions for futures contracts, whereas open interest basically tracks all the subtracted end-of-transactions. Open interest is a reflection of cash flow into the market and cash flow out of the market, as we said earlier, suggesting that, “Oh, this is a hot futures contract,” and helps to support trading decisions.

So, in a rough and tumble way, I just want to show how this would be called, you know, volume overall volume in the market by, um, just simply multiplying these two, summing these up. This would be considered the actual overall volume during a given day, and that would help indicate certain things, and it’ll go into detail how that would work. So, how volume helps with decision making is large changes in open interest can indicate when a certain participant is entering or exiting the market, but you want to get other clues with volume. So, volume can indicate the trader’s level of interest, overall the whole market’s interest on a particular future, and volume can indicate when to stop trading the front month futures contract and roll over to the next month. And we’ll talk about that in a little more detail in a sec. It also helps to show when a contract is most liquid during the trading day and across trading months or years. You can see patterns relatively that you can draw some conclusions about.

Now, some traders will look at the trends, and this is typically known as technical analysis, and it’s been widely debunked in academic circles, and generally, it’s not really a reliable means of evaluating the actual futures as well as predicting how things will go just based on this pattern and this shape. “Oh, well, it must, therefore, reach this threshold, and therefore it’s going to have to go down now because it went down a similar situation before.”

 This is called technical analysis, and it’s only effective if everyone else believes in it, and unfortunately, most people will have some independent thought in mind, and they’ll do fundamental analysis and try to really understand the broader macro and micro factors in an economy to help decide how to invest. But specific to the rollover concept for March, you’ve got this is the front month futures contract, and so this chart just is attempting to show how the volume is declining over time, and so you want to choose a period when to roll over to the corresponding June contract, and it only starts to pick up after a certain point, and this is a remarkably reliable pattern you’ll see in the volumes data.

So, you can sort of time when to enter and exit a particular contract and roll over, right, especially if you’re not intending to follow through with the contract to its expiry, which is quite common. The other thing is if there’s a lot of volume in the contract, as there’s more volume in it, you will be able to take advantage of a narrower bid-ask spread because as demand increases, the corresponding supply drives the price in an advantageous way for the traders.

Major economic events or, you know, the Fed or the Bank of Canada or other central banks making a declaration are also points where you’ll see higher volume in futures contracts around that time of day. So, if the price goes down, though, in the contract, and the volume is going up, you can’t necessarily assume, although you might logically, that the trend is that the futures is going to continue to go down because just volume doesn’t really tell you what’s actually happening. It could be that people are exiting a position or there’s a new set of more long contracts coming through than short contracts, and you can still have the prices go down nonetheless. And so, you can’t really draw conclusions on the basis of that either.

So, we talked about open interest, now let’s talk about futures contract specifications again and really hone in and understand this cleanly. So, we did that prior slide, which compared futures and forward contracts. You know, was the forward contract world private, highly customized, etc., etc. Futures contracts have the two major distinctions of being legally binding agreements to buy an asset at a specific date or a month in the future. It’s legally binding, and then the second big thing is it’s heavily standardized. So, quantity, quality, physical delivery, time, location, all that good stuff is in there. So, we’ve got some classic oil futures.

I’ll do just a walkthrough of one, but so Brent oil ice futures, European exchange, it’s a cash-settled futures contract. That’s one oil futures, it’s really powerful and widely used, especially in Europe. The one that a lot of folks do focus on is the West Texas Intermediate, and it’s hosted on, it’s licensed through the Chicago Mercantile Exchange Group, which is Chicago Board of Trade plus Chicago Mercantile, that combined in there, the CME Group. In Canada, we have the TMX Group, for example. So, this is from the CNBC website. We’ve got West Texas Intermediate crude. This is the July contract 2023. This was recorded in May of 2023, so these prices are these mark-to-market prices and today prices. And what we’re really seeing here is people making specific commitments as to what they are willing to put down in terms of money on these bets.

And so, by doing so, you’re providing the broader market with this instrument, this WTI, a predictive model of how things are going to play out in the future. And people reference this to help inform other financial decisions as a result. So, this is really this price discovery. This is the financial market participants’ money putting money on the table and saying, “This is where I think the price is going to be. This is why I would take a long position. I’m going to take a short position.” And thousands upon thousands of people are doing this, and so you’re having this global contribution to what we think the future will hold.

Of course, we don’t have access to future points in time, but this is what we think is going to be appropriate in terms of my betting, my investment today, and so that guides and helps people make decisions in the broader financial system. So, it’s quite a fascinating piece of data that people use who aren’t participants, but certainly people who are participants are looking at all kinds of inputs, analyzing, doing fundamental analysis, maybe even doing some technical pattern recognition stuff, but mostly really thinking hard about where they want to put their capital, and then they’re putting it in these futures contracts, and that provides again a predictive bet as to what the future will hold without having obviously access to future events, which no one does. So yeah, West Texas Intermediate.

Let’s take a look at the fundamentals of it. It is a contract, per contract, 1,000 barrels of oil. That’s a lot of oil. And on expiry, the oil must be delivered or received at a pipeline or storage facility in Cushing, Oklahoma at the contract’s reference price. So, this is the symbol. It’s CL, as you saw on the prior slide there, the CNBC website. It’s CL is the nomenclature for how you find the contract, and the underlying asset is light sweet. It’s referred to, and that refers to actually the carbon dioxide and hydrogen sulfide components of the oil. So, at what ratio those exist in the oil, they call it light sweet.

And then again, quantity 1,000 barrels has to be delivered to any location that’s specified in the contract. It could be Henry Hub or Athabasca, Louisiana in this specific contract. I should say West Texas Intermediate. It goes to Cushing, Oklahoma, which is at the just the top of the state that I think is kind of shaped like a meat cleaver, actually, and it has to go to that location on a specific time.

So, all these key components, what the underlying asset is, quantity of the asset, the location of the delivery, and the time of delivery, or all parts of the contract. We’ve talked about this before. You might get a phone call. You imagine if you just take a long position, so you’re going to be receiving the oil in exchange for cash in December. You might get a call in November. So, where do you want your oil if you only have a long position? This might happen to you.

So, what happened also is, like, dude, we have someone who’s going to take the opposite position and cancel these out. You could just settle in cash. Cool, that’s awesome. But you know, we’ve talked about this before. That could be an issue if you don’t, if you just take a long position. Be very, very careful. Another risk of futures I mentioned probably a couple of times now. So, we look at this contract, and you can look at the daily volumes. This is the CME website screenshot in terms of the activity on the contract and the energy around. Why do we care about this contract in particular? Specific trading hours are specified here as well, and that’s an important thing to keep track of.

So, just expanding on the CL concept, right, this is the title for West Texas Intermediate. You’ve got Z and six. Z and six, if you’re in the US, you call Z, right, zed. Zed represents December, and these are universal across the different exchanges. Futures contracts, they have a letter to represent each of the corresponding months so that someone can quickly snap their fingers and reference CLZ6. That means December 2026. The six represents the decade that you’re in, typically, or if you’re at the ninth year of a decade, you can still infer that this integer indicates a future year. And by the way, an integer is just a fancy way of saying a number, right, a digit. In the next year in which the number six appears. So, this is 2026 in this case. That’s the name of this particular contract and tells you all the information you need to know, right, right on the ticker basically.

So, the contract unit and notional value are another aspect of the specification document that they need to understand. So, the contract unit is based on volume, weight, and financial measurement. We’ve seen this before. The contract notional value, or contract value, is the expression of the contract unit and the current Futures Contract price. It’s kind of a word salad, but how is this notional determined? Let’s take the e-mini S&P 500 as an example and see how it’s calculated. Well, it’s equal to a multiplier designated in the contract times the S&P 500 Index. So, whatever the whole of the S&P 500 is doing, you multiply it by the multiplier and you have your e-mini calculation.

Now, let’s talk about classic Futures contracts. One example is the COMEX Gold contract. The contract unit is a multiplier of 100, and the measurement is in troy ounces. Another example is WTI, which we discussed earlier. It’s measured in a thousand barrels. Again, the unit or multiplier is important to understand. For the e-mini S&P 500, it’s 50 times the value of the S&P 500.

Now, let’s take a look at some screenshots from late April. We have the S&P 500 Futures contract with a value of 4,150 that will be settled in June 2023. The WTI Crude contract, also settled in June 2023, is priced at 69.98. If you have the prices, can you calculate the notional values? Pause the video, take a calculator, and figure out what the notional values are. Then, unpause the video and see if your calculations make sense.

When you unpause the video, here are the results: 100 times 2,225.5 gives you just over 200,000 barrels of oil. This gives you a notional value of 70,000. The S&P 500 gives you 200,000.

Now, let’s touch briefly on hedge ratio and bond math futures. We’ll go into more depth on these topics in a separate presentation. But for now, let’s understand that value at risk needs to be divided by the notional value to calculate the hedge ratio. If you have a hedging strategy where you need to deploy 10 million dollars, all you need to do is divide it by the notional value to understand how many contracts you need to take a hedge position. This is a basic understanding, and we’ll delve into more detail later.

Futures tickers

Next, let’s talk about future tickers and contract codes. It’s important to understand them. The contract name, contract month, and contract year are the key points. There are no license or CUSIPs associated with Bond Futures. Contract codes can vary based on the exchange venue. If it’s traded on more than one exchange, there can be differences in the branding used. For example, the e-minis have the code ES for the contract name, and the letter Z is the expiry month indicator. The last digit represents the ninth year of the decade.

Now, let’s look at the government of Canada 10-year bond, which has the code CGB. The letter U represents the month, with September being indicated by U. Knowing these codes can be helpful for shorthand communication. Different color codes are used to indicate the year when looking at electronic trading. Understanding contract codes is critical for quick online searches or using a trading platform.

All Futures contracts have a minimum price fluctuation, also known as a tick. Tick sizes are set by the exchange and vary by contract instrument. For example, the tick size of the e-mini S&P 500 Futures Contract is a quarter of an index point, which is valued at 50 bucks. Therefore, a minimum tick would equal 12.50. The tick size for WTI Crude oil is 0.01, or one cent, with units at a thousand barrels. Tick sizes are defined by the exchange to provide optimal liquidity and ensure reasonable bid-ask spreads.

To find the minimum price fluctuation for any TMX Group contract, you can refer to the product specification page. This information is available for Futures Contracts on any global exchange, not just TMX. It’s important to understand these tick sizes for liquidity and trading purposes.

This concludes this video. In the next video, we will delve into Bond Futures. Thank you for watching the entire video. If you found it helpful, please subscribe, like, and consider checking out my online course on Bond Math, which you can find in the description or on my blog. I look forward to continuing the learning process with you. Let’s keep going, and I’ll see you in the next video.

Summary of Mission economy: Moonshot guide to changing capitalism by Mariana Mazzucato

The following is a thought piece based on Mariana Mazzucato’s newest book “Mission Economy: A Moonshot Guide to Changing Capitalism”. I blend her ideas with my own, but give her all the credit for what’s below. 


Our world is in need of some serious change.

We’ve spent the past five decades being told that governments should get out of the way, but as a result, we’ve hollowed out the core of the public sector. We’ve stripped bare the entities that serve the public interest over private profit. Our greatest risk is that we will continue to stand by idly while the current trajectories persist: growing financial inequality, more uncapped carbon emissions, systemic and intentional discrimination, widening identity polarization. If we don’t turn these four horses of the apocalypse around, we’re headed for somewhere between Mad Max and The Hunger Games. How did we get here? What can we do? Who should take the lead?

Political Economist Mariana Mazzucato recently released a brilliant book on reshaping capitalism through a more inspirational and empowered public sector. She argues that:

a)   There’s a burning platform: Capitalism is in crisis

b)   We drank the neoliberal kool-aid: Or, the myth that governments should stay out of markets

c)   We can rise above: Governments must be the ones to inspire change through bold and decisive missions (i.e. the Moon Landing)

Below are a blend of ideas and quotes from Dr. Muzzacato mixed in with my own commentary. Please reach out if agree, disagree, or want to dive deeper on any of these ideas.

There has been incisive criticism of Mazzucato which is that she is a) an academic, b) an economist (social science is notoriously complex and counter-arguments are easily found), c) she has never ran a business, started a company or really innovated herself so what does she actually know about it…….but still her message is inspiring and it resonates.

A) Four Reasons Why Capitalism is in crisis

“Human activity is eroding the conditions necessary for social and environmental stability.”

  1.   Finance is only financing FIRE (finance, insurance, real estate).

·      Global finance has become a bit of a castles-in-the-sky scheme, according to Mazzucato. 80% of financing goes back into financial firms, while manufacturing, agriculture, technology, and public services suffer. The process of price discovery and allocating scarce capital, has gotten to a point where it is too self-serving. FIRE profits are private, FIRE losses are public (a moral hazard). This destroys the incentive to innovate.

·     This current structure fuels a debt-driven system and speculative bubbles that, when they burst, bring banks and others begging for government bailouts.

2.   Business is focusing on quarterly returns.  

·      Over the past decade, 52% of the S&P 500’s net income was handed to shareholders in buybacks, and 39% of net income was handed to shareholders in dividends (that’s 91% of profits!). Rather than investing in Capital Expenditures (i.e., plants, equipment), R&D, worker training, wages, or communities…profits go to capital owners. Only 9% of returns are invested in the future.

·      According to legendary GE CEO Jack Welch, “Shareholder value is a result, not a strategy…your main constituencies are your customers, your employees, and your products.” He wouldn’t last a week on present-day Bay Street.

·      Most CEOs don’t have the courage to break from their quarterly earnings cycle and dedicate their strategy towards a long-term horizon (>1 year). Their boards don’t have the courage to direct them to do otherwise.

3.   The planet is warming.

·      If we don’t reverse our industrial policies in the next ten years, our climate breakdown will be irreversible. We’re trending for 3+ degrees Celsius, and the Global North is starting to experience what the Global South has been living with for years (i.e., wildfires and floods).

·      Our economic system is set-up to propagate this trend: fossil fuels dominate our energy sources, industries are too carbon-intensive, the financial sector has fed the fossil-fuel driven economy, government is nurturing this dysfunctionality. Wholesale change is needed.

4.   Governments are presiding, not leading.

·      Governments have bought into the ideology that their role is simply to fix problems (i.e., market failures), not achieve bold objectives. Says who?

·      Governments create and shape markets through: investment in areas like education, research, and physical infrastructure; demand generation via procurement; legal codes; and anti-trust policies. They even print the money that flows through markets. There are no markets without governments.

·      Governments need to use their central role and resources to rethink corporate governance in order to broaden the range of stakeholders valued by capitalism.

B) Five Myths About Governments that we have all decided to believe

“Since the 1980s, a mindset of aversion to risk has filled civil servants with the fear of doing anything more than facilitating the private sector.”

Myth 1: Businesses create value and take risks; governments only de-risk and facilitate.

·      It’s governments that actually make the riskiest bets, with the highest uncertainty, at the largest scales. Government bodies created the internet (DARPA, CERN), the GPS (US Navy), Siri (DARPA), and touch-screen display (CIA).

·      Public institutions have lost the confidence to act and are failing to invest in their own capabilities: strategic management, decision science, and organizational behaviour.

·      Decades of privatization and outsourcing have led to high costs, poor service, and the capture of government contracts by a small number of firms—billions of dollars going to consultants with little skin in the game.

Myth 2: The purpose of government is to fix market failures.

·      Market failure theory (MFT), evolved from microeconomics, argues governments should only intervene when markets break down (i.e. positive externalities, negative externalities, information asymmetries). Under this theory, however, markets are in perpetual failure and governments should always be intervening.

·      Public choice theory (1960s) pushed this idea further and said that government failures are worse than market failures. They assumed that policymakers and bureaucrats were purely self-interested and prone to corruption and ineptitude. How Hobbesian.

·     But government spending doesn’t crowd-out investment, it crowds it in. It creates spaces for innovation and collaboration between parties that would never occur in pure competition. It takes risks that businesses never would, driving the world forward.

Myth 3: Government needs to run like a business.

·      New Public Management (NPM) arose in the 1980s in business schools to suggest that there should be a profit-motive involved in government to make it more efficient. It caught on during the Thatcher-Reagan-Mulroney years and spread across the globe in the 1990s.

·      NPM led to deregulation (encouraging risky behaviour), shareholder value (enriching executives at the expense of long-term investment); and outsourcing (leading to loss of public control over the quality of services and products). But at least it made some shareholders richer.

·      NPM assumed that the public sector suffers from a principal (citizens) – agent (bureaucrats) problem: citizens can’t hold the public sector accountable the way shareholders can a corporation. But besides voting, the public sector is often held to a much higher standard than the private sector.

Myth 4: Outsourcing saves taxpayer money and lowers risk

·      The gutting of the public sector over the past five decades has led to management and IT consulting firms taking over increasingly larger roles of developed governments. The problem is, they often suck at it, and they cost 1.83x more than experienced civil servants (in the US).

·      In the UK, the National Accounting Office estimates that a typical project with PFI (public-finance, private delivery) is 40% more expensive than if done in house. Consultants suffer from a worse principal-agent problem than civil servants: they serve profit, not citizens, and are incentivized to drag out engagements (see Phoenix Pay System).

·      This trend has encouraged developing countries (pushed by the World Bank and IMF) to privatize and outsource key services (i.e., waste collection, school meals, building maintenance, prisons, and even ambulance and probation services). All while economists and political leaders continue to push for smaller governments and balanced budgets.

Myth 5: Governments shouldn’t pick winners.

·      A government that lacks imagination will find it more difficult to create public value.

·      Industrial policy is the policy of picking winners. Policymakers need to make decisions, and of course, they must pick things. Their choices could include seizing technological lead in a sector, diffusing knowledge, creating jobs, raising productivity and incomes, boosting regional development, and defence.

·      The real problem is the practice of socializing risks and privatizing rewards. The same year the US government made the $535M guaranteed loan to Solyndra, it made a similar loan of $465M to Tesla—now a global leader. Somehow the $4.9B in government loans received by Elon Musk’s three companies is left out of his narrative as a daring entrepreneur.

C) Governments must take a “missions” approach to solving society’s grand challenges

So what do we do about it? Muzzacato dedicates the second half of her book to this question. First she uses the Moon-landing as an example of an inspiring “mission”, which not only rallied the public and private sectors to achieve a historic feat, but also inspired innovation and invention that spilled over into countless markets, benefiting all of society (i.e. camera phones, athletic shoes, foil blankets, dust busters, baby formula, wireless headsets, artificial limbs, computer mice, portable computers, freeze-dried food, CAT scans, smoke detectors). Second, she asks us to “aim higher” by selecting ambitious and inspiring missions for our society to tackle, led by governments, such as implementing a Green New Deal, innovating for accessible healthcare, and narrowing the digital divide. Finally, she concludes with seven principles for the New Political Economy, summarized below.

Seven Principles for the New Political Economy

“Real progress will only happen when stakeholder governance and ‘purpose’ become central to how organizations are governed and how they interact.”

1. Value: collectively created

·      Our dominant economic framework rests on the assumption that people maximize their own preferences. This is not always true (i.e., Prospect Theory). We must believe in the value of public purpose and its ability to serve the public interest. This starts with openly caring about more than our individual interests: the term “idiot” comes from Greek, meaning “someone who does not operate in the public sphere”. Are you an idiot?

·      Public goods are worth more than their costs. They have “multiplier effect” impacts that echo through society.

·      We need business, government, and civil society to create value together, with none being relegated to cheerleaders of the other.

2. Markets: shaping not fixing

·      According to Market Failure Theory, governments should only step in to correct market failures: positive externalites (under-investment by private sector—basic research), negative externalities (pollution—carbon taxes); asymmetric information—(banks’ risk appetite—loans to SMEs). But MFT also operates under the assumption that markets are perfectly competitive. They are not.

·      Governments must actively “co-create and co-shape” markets. They must go from market fixing to market shaping; being proactive rather than reactive. Markets are dynamic, even if economists believe they operate in a vacuum.

3. Organizations: dynamic capabilities

·      A theory of innovation needs to be nested in a theory of learning, experimentation, and adaptation to uncertainty. Learning by doing is a key element in improving an organization’s fitness and developing “absorptive capacity”. This must be adopted in the public sector. Its okay to take risks.

·      Public organizations must find new ways to create and implement strategic actions (i.e., leadership capabilities, engaging with groups), rethink how civil service is developed (i.e. training, performance assessment, promotion), and re-imagine how work in public organization is managed (i.e., cross-sectoral, iterative).

4. Finances: outcomes-based budgeting

·      The “urgency to win” means funding is always available for wartime missions and crises. There is no reason why the “whatever it takes” mentality cannot be used for social problems. What if budgets were based on outcomes to be reached instead of haphazard cost-benefit analyses?

·      Public sector deficit is private sector surplus. National debt, which so exercises many politicians and citizens, is actually the historical accumulation of money spent by government, not taxed back, and now a privately held asset. Government red ink equals private-sector black ink. Debt is okay.

·      Government spending only runs into problems (i.e., inflation) when there’s no growth in the economy. Financial institutions are the last place it should go. Instead, some key factors that increase productivity include education, research, science-industry linkages, worker training, and patient (long-term) financing.

5. Distribution: sharing risks and rewards

·      Wealth is created socially: all inventions stand on the shoulders of giants, which likely stood on the backs of public sector investment. We must move from redistribution to predistribution: collective ownership structures, government equity in companies (preferred shares), and stable employment.

·      Government loan guarantees and bailouts should have more conditionality. Public risk and private profits erodes faith in government capabilities.

6. Partnership: purpose and stakeholder value

·      The notion of “purpose” and stakeholder value is not only about changes to corporate governance but is also about the details of contracts between business and the state.

·      Stakeholder value means weighing the importance of workers, communities, and environments alongside shareholders. In Scandinavia, trade union members sit on boards to help steer investments and remuneration. Meanwhile in Canada, nearly all corporate entities have busted up their worker unions. No wonder >50% of jobs are part-time or contract.

7. Participation: open systems to co-design our future

·      Mass publics are deserting the old-line, oligarchical political organizations that mobilized them in the modernization era—but they are becoming more active in a wide range of elite-challenging forms of political actions (a renaissance of democratic engagement).

·      New decentralized forums are needed that bring together different voices and experiences, such as citizen assemblies.

Guest blog post by Drury

Canadian Political Parties | A History

These are academic notes from my days at McGill University. Enjoy!

Conservative Party of Canada

  • Discussion: Conservative Party of Canada
    1. aspects of conservative ideology
      1. past
        1. emerge from larger quarrel between landed rural aristocratic vs newly urban mercantile power 
        2. traced to the aftermath of english civil war tories supporters of the crown and church of england
        3. Tory used as an isult to those more supportive of the crown than parliament and the anglican church vs other protestants
        4. then put to loyalist in US 
        5. french revolution; got a bust from Bruke, reflection on french revolution 1790, if reform in the absract not a bad thing it had to be done in a gradual organic way
        6. argued that a society was the product of a slow and infinite process of historical dvp, the revolution in france were wrong to throw out the old for something new
        7. aftermath of french rev. Cons upheld of the institution of aritotacracy, monarchy and church power, oppose constitution and reps. Gvt (cont europe)
        8. William Pitt premier, revived tory faction dominates parliament. This tory faction was united in its opposition to the French rev and the tinkering with time honored english institutions
        9. split in 1820’s of rights of protestants and christians
        10. tories later accepted the reforms of the whigs, 
        11. say taht there tasks was to maintain what remained of the institutions
        12. tory democracy, Disraeli argued that the tory aristocrats and the not liberal plurocrates where the real friends of the workers, and to bridge britains social class differences due to there acceptance of hiearchicahl
        13. moderate vs radicals squable gave the liberals there win, du to claiming the middle ground, ended up being a more moderate vs a more radical version of liberalism 
        14. 1830’s in the US the american whig party (more cons, than british) aruged that it was natural for a few to have the wealth and power
        15. acused democrates, who advocated more liberal democracy, as putting the poor vs the rich and pandering to the riches
        16. British North American context, 1791 constitional act
        17. british reaction to weak exectuive power in the american colonies, by strenghtening hte aristocrates and the monarchy
        18. realtively weak elected assembly
        19. Horrowitz argues taht there was a tory influence in Canada’s political culture, a tory touch was imported by the loyalistes, tories rejected american liberalism due to its emphasis on democracy and individual
        20. tories had vision of an organic community that required the sacrifice of individuals critisized thtat there is little evidence of tory connection between the tories and the conservatives of the 19th century
        21. Hrrowitz accused of abusing the term of tory, trying to force all political ideas into black white, liberal conservative argument when there was a lots of shade
        22. paints tories and paternalistic aritocrats 
        23. Cdn tories were simply a self seeking elite concerned about enriching htemselves and there family, (Smith, Stewart)
        24. not champions for a common good, but of an individual ideology to willing to sacrifice common good for own individual powers,
        25. building personal fortunes at public expenxe
        26. 1820s and 1830,s were associated to chateau clique and family compact, leaders of busines elites that were aligned with monarch, hostile to dem, this group was dubbed tories, simply conservative liberals using ties to the crown to promote own interest
        27. there version of liberalism was more conservative that the US version but was still liberal 
        28. Patriotes; embraced the american democratic ideals , but rallied agaisnt commercial linked power,civi humanist values, wanted to maintain agricultural community to stop from bads of capitalist industries
        29. The reinvigoration of the catholique church
        30. they had opposed papino du to anti-church, they came and favored a partnership between churhc and state rather than subordinate role
        31. 1871 programme catholique, rejectied principle of church and state and to oppose liberalism as a political doctrim, catholiques were ordered to vote for conservative (certain) or abstain
        32. Castors or Programiste advocated a mroe exclusionary approach to politics
      2. rise to present
        1. achievement of resp gvt in 1840’s fundamental change to united provinces, Baldwin and Lafontaine alliance began to fray
        2. out of the ashes of realignement , BNA tories began to moderate and a more central liberal coaltion came to be and included, conservative reforemers known as the bleu and a handfull of tories in the west, the new party liberal conservative party lead by August-Nobert Morin and McNab, they realised that if they wanted to keep power
        3. they need to put french and english interest together succeded by MacDonald and Cartier, leader of the bleu,rep stable majority of french people and english business leaders (wanitng to keep montreal as business centre)
        4. the MacDonald tories had a pro-british anti-us vibe
        5. opted for equal treatement of religions, gained support of catholic church and the main anglican denomination, even the anti-catholic orange
        6. bi-cultural linked together by powers and the spoils of econ force that it would create. Liberals conservative became champions of a united BNA, unstable leg was reason for wanting new politicla order to have more stability to have better econ evolution
        7. using patronage and nationalism claimed to be the natioanlist party and formed gvt in the gvt of the dominion, gained tupper tiley in the Maritimes
        8. years after confederation
        9. Carties dies in 83 but coaltion surives and dominates first 30 years of Dominion they were in power and controled patronage and other therefore able to increase its influence in both western canada and maritimes, closely linked to business community and railroad, became firts national party
        10. earned a reputaion for a party of great enteprise and the interest of the nation at heart
        11. it was these great enteprises and its close link to business interest htat caused the CPR scandal, Sir John A got donations from a company that was bidding to build the CPR,  
        12. fell from power but in 1878 elections the conservative regain power by successfully identifying with the cause of nation building through the NP adoption of protectionist tarrifs, rapid construction of national railway to have east west economy and increased immigration in the west
        13. description of liberal conservative party as the canadian party these econ policy mades sense due to recession and please Montreal and Toronto businessmen
        14. Macdonald vision of Canada was focused on created an industrial power, link to industrial power and loyalty to hte flag, the NP was being sold as a benefit to all Canadians but benefits were better for some
        15. 1891 elections ultimate example of cons as nation building rampid anti US and a lot of NP, claimed liberals could not be trusted with country and power, they said that there policy would result in the absorption of Canada in the US exemplified in the old flag, old policy the old leader, poster suggest common national purpose, tories won 1891 elections but MacDonald dies, beginning of crisis and downfall of conservative power, crisi for dominion as well
        16. cons and Macdonald identified as nation building
        17. John Abbott was chosen as leader because he was not particularly obnoxious, quickly replaced by Thompson who dies 94, then Bowell replaces then in 96 Tupper takes the healm, conservative fall to the Liberals
        18. victim of its own success, had succesed on one hand but then it could no longer act as a bridge builder between regions and econ interests
        19. cons had emerged as the centralizing power and party now faced liberal provincial rights movement of Mowatt and Mercier and liberals ran 4 major provinces, then loss of quebec meant that the cons lost there base of power loss of power in manitoba and NB due to language questions
        20. with death of Cartier bleu and castor unity was hard to keep castor became a virtualy autonomous party
        21. Chapleau came closest to replace Cartier, believe in econ dvp and benefits for montreal interested in nation building 
        22. never succeded in gaining Cartier level of influence and unity (1880’s) controversy over NWR and Riel, increasing tensions between french and english fraction the cons party, church hierarchy starting to oppose them as well due to some moderates, 
        23. this moderation of opinions opens door to liberal
        24. Chapleau given minor portfolio in Abbot gvt and took in personaly left Abbot and cons very weak in Quebec
        25. Manitoba school question made Chapleau leave the cons caucus still refused to return due to lack of remedial legislation adn that he could see the writting on the wall
        26. MacDonal was able to keep factions together but no other leader was able to keep the protestant english imperialist vs french catholics business 
        27. it did this by focusing on territorial and econ expansion, became more dificult with time 
        28. after death reatreated to protestant base and open doors for moderate liberals
      3. mistake to confuse conservative party and toryism
    2. the fundamentally ‘whiggish’ nature of Conservative party consistant with liveral ideology 
  1. the conservative party
    1. most succesfull due to attaching itself of national intergration19th century
    2. then when it reached its max they were’nt able to keep power

Ideological Currents (2): Liberalism in Canada

  1. Although liberalism became entrenched as the dominant ideology of the Canadian political order in the 19th century, the Liberal Party was slow in emerging as a potent political organization;
  2. It was only as debates over liberalism in Canada came to be resolved in the latter years of the century that the Liberal Party was able to establish itself as a national political party;
  3. The other crucial element to the rise of the Liberals as a national party was that, consistent with their ideological similarity to the Sonvervative Party, the Liberals adopted their core policies and became identified with the process of national integration. The result was that the Liberals were able to replace the Conservatives as Canada’s dominant national party.

John Locke

  • Liberalism can be traced to John Locke
  • an industrial bourgeoise ideology, a bid for a share of the power in British aristocracy
  • Liberalism varied from country to country
  • at its core, Liberalism is reflected by the notion that man is able to govern himself and control himself, so it is opposed to absolute monarchy and advocates parliamentary or representative government, bound to the rules of law, subscribed to the notion of natural rights (foremost of which is property that includes life and goods)
  • tended to advocate laissez-faire (minimal governmental involvement in the economy) including free trade at the international level

Liberalism in Government

  • until the 1840s it was kind of an insult to be called a Liberal
  • mid to late 1860s, the British Liberal Party became well-established 
  • ideas carried by the French Revolution
  • in the United States, liberalism was at the heart of the political culture, e.g. Jacksonian democracy “Equal rights for all, special privilege for none”
  • don’t equate liberalism with democracy, not all liberals were democratic, e.g. they did not all support universal suffrage, that only is accepted later 


  • standard manifesto of human rights

The Canadian Case

  • liberalism influenced the reforms, the reaction against the colonial government
  • argued that the BNA Act entrenched an oligarchy
  • American Republican ideology influential
  • Mackenzie sympathized with Jacksonian ideal, reflected in demands for elected legislative
  • calls for responsible government
  • like British liberals, wanted to extend the democratic franchise, wanted to turn appointed positions into elected ones, wanted to inform the constituents and have equal votes
  • British North America class largely subscribing to liberalism

Ian MacCae

  • writes of the emergence in BNA of “liberal order” that sought to realize the political and economic principles
  • argues that liberty, equality, property, became the dominant philosophy
  • argues that liberalism is a secular religion
  • the interaction of ideas in liberalism imported from the UK and America
  • notes that this was a very highly qualified type of liberalism, champions the cause of the individual, but with limits, e.g. who has a stake in society (those with property, only men, no Aboriginals or Japanese or Chinese…and only some Catholics, only some French)

The Rise of the Liberal Party

  • like the Conservatives, can trace its roots to the Baldwin-Lafontaine union breakdown
  • Clear Grits based out of southwestern Ontario including Toronto, inspired by American liberalism, championed by MacKenzie, challenges the coalition for being too elitist and conservative
  • “grits” a Masonic term to build a better society
  • Clear Grits especially upset by undue French Catholic influence, so advocated “representation by population”, banking on western Canada being able to dominant eastern Canada based on population growth, in contrast to equal representation for eastern and western Canada
  • Clear Grits protested big business in Montreal
  • there were also more moderate reformers led by George Brown, editor of the Toronto Globe, drawn from British liberal tradition, representation by population, supported by Toronto business
  • “the Rouge” were led by Papineau, members of the professional class of the Canadien population, influenced by French liberal tradition, especially 1848 Revolution, were nationalist Canadien, had favoured BNA’s annexation to the US as a means to Canadien self-government, opposed Confederation which they saw as subjugation of the Canadien, strong anti-clerical
  • mutual excluding agenda of French and English made it difficult for the party emerge against the Conservatives
  • coalition led by George Brown and Antoine Aime-Dorion: the Reformer Liberals, to bring about the confederation, but it broke down
  • in the first decade of the Confederation there was no Liberal party, simply a grab-back, united only in their opposition against the MacDonald government which was forced to resign from a scandal
  • 1874 the Liberals led by Mackenzie (not William) argued for a more moral, limited, frugal, government, made up of Ontario liberals (inspired by British liberalism) and the Quebec Rouge, which had moderated themselves to accept federalism and the Canada Firsters, a group of independent nationalists who had criticized Macdonald for the coercive means of consolidating Confederation (including William Blake, former Ontario premier) and the Ministerialists, who supported the government only to be on the government’s side of the house, previously supported Macdonald
  • the Canada Firsters quickly turned on Mackenzie for not doing enough to strengthen and consolidate the new dominion
  • this all prevented emergence of a strong party, no strong cabinet, uncharismatic leader
  • but did enact a number of reforms, e.g. new military college, the Supreme Court of Canada, did away with non-simultaneous elections, the secret ballot
  • took office in 1874 just as an economic recession began, government took a slower pace in building the railway, BC threatened to separate, by 1878 the coalition is turned out of office
  • two years later, Edward Blake succeeds Alan Mackenzie as leader
  • still not a truly national party, still Ontario-oriented, issues still had little attraction outside of Ontario
  • Blake broke with tradition in a couple key areas: tried to break the anti-Catholic, anti-French sentiment and the support for free trade (went closer to Macdonald)…but still was lacklustre 
  • took the leadership of Laurier to forge the factions into a party

The Laurier Liberal Party

  • Laurier was a former Rouge but his views on liberalism had evolved to espouse British liberalism over American liberalism of the Clear Grits
  • reflected in his speech in 1877 that responded that denounced the execution of Louis Riel and came to be seen as a better protector of French Canadiens
  • continuing tough economic times in 1880s weakened support for Macdonald
  • Laurier called for the abandonment of the protectionist tariff and called for free trade, result was the liberal defeat in 1891, for leading Canada into the arms of America, adopted to calling for less restricted trade (ambiguous) and won back power
  • they come to power as economic boom begins, Liberals benefit, emerging trans Canada economy, economic nationalism is the one issue amongst with Canadians will rally around, so the Liberals adopt it as their own, back the construction of two new trans continental railways (in addition to the CN), a liberal business alliance based on urban centres, new immigrants voted for Liberals, the party of state building and national consolidation, also successful because they were increasingly able to count on support from Quebec, shed their anti-French heritage in Ontario, reflected in Mowat’s policies in Ontario to benefits Francos and Catholics in Ontario, also benefited from the decline of the Conservative party’s fortunes, able to attract moderate Quebec Conservatives like Chapleau and Tarte, the party of French-English cooperation
  • the change of government in 1896 was primarily a change of names rather than of policies or leadership styles, the triumph of liberalism in Canadian political culture, whether liberals associate with either party, all of these individuals espoused classical liberalism from Britain adopted to BNA realities, as long as they continued to represent the rural farmers they were no match for the business-minded Conservatives, Mackenzie had failed because he had not granted enough consessions towards this group, only won with agrarian support, switched their support to the Conservatives and brought them back to power (?)

The Two-Party System

  • both parties were ideologically similar, convergence to the centre, as party became more national it was less likely to take a position that would offend a side, gaining power was contingent on appeasing all
  • by dawn of 20th century, a two-party system like America’s, where each party seeks the support of all, a state-building party, a party of national consolidation

Getting the Message Out: Politics in the Early Mass Media

Main Arguments:

  1. The emergence of political parties and the press in Canada were intimately linked. Politicians and parties relied on the partisan press to get their message out, and the partisan press benefited from government and party patronage.
  2. Although close, the party-press relationship was conflict-ridden. (Still is.) While the emerging political parties strove to obtain and maintain newspapers that would be their mouthpieces, this was increasingly problematic as newspapers moved to assert their independence.
  3. Canadian political parties and the press were linked by, and owed their parallel rise to the ideological ascendancy of liberalism, however, the implications of liberalism, especially liberal capitalism (e.g. market forces), contributed to the undoing of the Victorian-era relationship between press and party.



  1. The Party-Press Relationship up to Confederation
  2. The Party-Press Relationship after Confederation
  3. Evaluating the Party-Press Relationship: The Significance of Patronage
  4. Evaluating the Party-Press Relationship: The role of Party Organs
  5. Conclusion 

Up to Confederation

  • by 1858, the province of Canada was served by 20 daily newspapers, 18 tri-weekly newspapers, 15 semi-weekly newspapers, and 156 weekly newspapers (a lot!)
  • the sole medium of mass communication
  • editors frequently found themselves catapulted in political careers
  • politicians frequently found it necessary to become owners of papers
  • how many politicians got their start in journalism? included William Lyon Mackenzie and George Brown (founder of the Toronto Globe, which became the voice of the Clear Grits) and Alexander Mackenzie and Wilfrid Laurier
  • the newspaper provided politicians with political education, organization
  • growing importance that politicians attached to newspaper support is evident in the increasing funds spent on newspapers and printers, 1/5 of government spending in pre-Confederation Canada, an important source of revenue that encouraged close cooperation between the parties and press
  • this accomplished 3 important tasks:
    • created a communication system that could tie together local supporters, keep them informed, essential to party cohesion
    • propaganda instruments, boosting party leaders and their policies
    • endless critique of a party’s opposition, a means to build up and a means to put down

After Confederation

  • partisan papers defined the party line, advertised for the party, and for the emerging party system
  • an uneasy institutional marriage
  • in the mid 1880s, 37 weekly and daily papers went to the PMO
  • schmoozing, flattering, patronage towards the journalists
  • journalists were power brokers, clients and bosses
  • Brenton McNabe claimed his active political work on the Conservatives was integral to his journalistic duties, they were one and the same, one fed the other
  • adopting a party name gave a paper instant readership
  • partisan politics was just another complication that had to be dealt with
  • dominance of the partisan press
  • most centres had both a Liberal and a Conservative paper
  • only 6 newspapers were allegedly independent
  • the strength of the partisan press suggests that 19th century newspapers were the handmaidens of political parties
  • fear and greed
  • but don’t overstate matters
  • the partisan stance of many newspapers was often little more than a marketing strategy
  • there are too many examples of allegedly partisan newspapers of criticizing the parties to whom they were supposedly subordinate to make the claim that they were subordinate

The Significance of Patronage

  • the political operators?
  • newspapers continued to receive subsidization after Confederation
  • parties punished and rewarded their enemies and friends
  • in 1880, an editorial denied that subsidization meant subservience, because the rising operating costs of an urban daily newspapers far exceeded any patronage obtained from the government 
  • in the years that followed, evolution
  • papers service a commercial market and cannot survive on patronage alone, e.g. management important
  • significant patronage only a pipedream 
  • the fact that patronage was declining in the importance in newspapers is seen in the fact that even if the party in power changed, the stripes of the papers didn’t change, they stuck with the original ideology
  • Toronto Mail, a Conservative newspaper, became increasingly assertive, Sir John A. tried to increase funding towards it and then tried to withdraw it but neither technique prevented it from criticizing the Conservatives
  • the emerging highly competitive market conditions outweighed the benefits of patronage
  • checked the practical control that politicians had over papers
  • disappearance of scores of local papers and increase in urban dailies

The Role of Party Organs

  • e.g. The Toronto Globe, which had a unique status in the early Liberal Party by serving as the mouthpiece of the Clear Grits
  • Clear Grits “the party of the newspaper” (shows how great the paper was)
  • e.g. The Montreal Gazette championed the cause of McDonald’s Conservatives
  • Edward Blake went to extreme lengths to preserve the Toronto Tribune with the aim of making it court the Catholic vote in Ontario
  • ensures a party voice during elections
  • in Saskatchewan, the provincial Liberal government of Thomas Scott established a German language paper, the Saskatchewan Courier, to court to Germans (second-largest immigrant group) to the Liberals
  • in Quebec in 1880, Wilfred Laurier established L’Electeur (later Le Soleil) and financially backed it, issued almost daily directions, had control over its editorial policy
  • La Patrie taken over by a Liberal Minister 
  • Le Canada established by the Liberals as a mouthpiece in Quebec
  • La Press established by the Conservatives
  • William Lyon McKenzie King tried to establish a paper in Ottawa but failed, showing that the concept of the party organ (which oversimplifies a complex relationship between parties and press) was over
  • they sponsored newspapers, they gave patronage, they retained control over editorial policies
  • after 1880, only the Toronto Empire was an organ, no other paper in Ontario that filled the profile:
    • in the hands of a few politicians
    • regular and direct intervention in the editorial policy by the party
    • complete financial dependence on the political party

The Undoing 

  • exercising a more independent role
  • resisted by the politicians
  • concept of party organ implies a degree of centralization and resources on the part of the parties that in reality did not exist at this time
  • difficulties that both parties had in maintaining a party organ in the Toronto market, seen in effort to control the Toronto Mail, the Toronto Empire (in course pack)
  • growing ideas of professionalism and the dictates of Liberal capitalism were seriously diminishing the scope and value of partisanship 
  • editors came to resent the image that politicians were subservient
  • result is a deterioration between the Toronto Globe and the Liberal Party
  • Toronto Evening Star (becomes the Star) was to be the new Liberal Party organ
  • efforts by political parties to ensure reliable mouthpieces in the media were in fact declining, costs outweighed benefits
  • the only way that political parties could retain their influence was if that newspaper was not commercially successful (i.e. nobody was reading it and it needed cash)
  • this ran counter to the principle of a party getting involved in a newspaper, it would be pointless if no one was reading it, even if circulation increased, the importance of the funds they were getting declined in the ratio
  • also problematic for the continuation of party organs was the evolution of the newspaper business, the number of dailies had peaked, rising costs of running one, intense competition, urban markets could no longer support multiple papers and small communities could not even support one
  • evolved from being an advantage to a disadvantage
  • papers needed to be non-partisan, if there’s a limited number of readers, you need to broaden your circulation, to remain partisan denied growth
  • also related was an increasing professionalization of the newspaper business, a separation between the journalists
  • as a result, the partisan nature of the Canadian newspaper business began to decline
  • Canada’s political parties did not have the resources to prevent this
  • the leadership of the two political parties was isolated, one less means by which to get their message out, they were now denied a primary vehicle of communication
  • ultimately this disruption of the Victorian era relationship contributed to the organizational weakness of the two national parties
  • it also undermined electoral support, lost the propaganda machine

“Not Won by Prayers Alone”: The Patronage System

  1. It is impossible to understand the emergence, consolidation, and functioning of Canadian political parties without examining the role of patronage. The two national political parties relied on patronage to expand and strengthen their presence throughout the Dominion. In so doing, patronage became an important vehicle of national integration.
  2. The close ties between political parties and the business sector were reflective of the centrality of patronage in helping spread and establish the liberal project in Canada, but also led to a number of scandals.
  3. While patronage served an integrative function in terms of both political parties and Confederation, it also (paradoxically) reinforced parochialism and led to the neglect of crucial issues about the nature and operation of the Confederation project. Increasingly, the patronage system could not be sustained in the face of Canada’s linguistic and regional cleavages, and the country’s socio-economic evolution.

Background and Patronage in BNA

  • what is patronage?
  • e.g. Walpole using appointments to organize core supporters in British parliament
  • Andrew Jackson did away with permanent positions and introduced the concept of turnover to democratize the civil service and avoid entrenched corruption, known as Jacksonian Democracy, contrasts to the Canadian case, lead to the “spoils system” and the emergence of the phrase “to the victor belong the spoils”, allowed Jackson to organize his supporters and reward them with public office appointments
  • in BNA at the heart of responsible government debates, who should control patronage, the transfer of patronage from those who wielded it to those who wanted it, gaining access to the spoils of power, encourage participation in emerging party system, if you want something accomplished (political favour) you have to go to the party in power, a sword of revenge against political opponents, a threat to keep supporters in line, the result was that the spoils system was introduced in the BNA civil service, patronage became the guiding principle of civil service appointments, party loyalty, little concern for efficiency
  • in the 1850s/60s there was no party staying in office long enough to benefit from the potential of patronage

Patronage in the Age of McDonald – National Integration and National Scandals

  • Confederation created a bonanza of patronage
  • every province was going to obtain or retain (ON, QC) its own legislature
  • in addition, a whole new level of government, the national legislation
  • whole new slew of appointments
  • additionally vast new public works projects (to purchase the support of voters), e.g. transcontinental railway
  • Conservative Party was in power first, had access to the spoils of power, could consolidate its position and expand its support, explains why the Conservatives emerged first, Macdonald was a master in the art of patronage
  • after 1867 election, Nova Scotia sent nearly all anti-Confederation MPs to Ottawa, but Macdonald wooed them all, a cabinet seat for Joseph Howe, converted to the Conservative cause and Confederation
  • benefits flow exclusively from loyalty to the Conservative Party
  • people take care of what  takes care of them
  • on the ground, Macdonald’s own riding of Kingston, patronage distributed in bureaucratic fashion, local party workers evaluated and recommended to the MP (Macdonald) for appointment based on service, an employment agency
  • system deliberately excluded outsiders in terms of geography and partisanship
  • patronage given only to local figures who could prove their loyalty
  • operated at all levels: judgeships and other senior appointments
  • Macdonald thought politically neutral civil service was naïve, outdated
  • civil service colonized by the political party
  • Gomery Inquiry: interest of national unity, convergence of interests, scandal and corruption
  • need for money
  • kickback: a company or individual who has received a contract will automatically give back a percentage of the earnings to the party
  • business-political symbiosis, business gain and political profit 
  • at the heart of the emergence and dominance of Liberalism
  • like the press-party relationship, difficult to say who was the patron (boss) and client in the relationship because each side had power over the other, each side had the ability to punish and reward, each side exploited the other’s needs and abilities to advance their own interests
  • The Pacific Scandal, 1872-74: two rival business groups made a bid to build the Canadian Pacific Railway, one from Toronto and one from Montreal, enormous project, Macdonald holds off on a decision until after the election so he could hit up both consortiums for a donation, after 1872 he forced them to conglomerate, Americans were forced out, and in anger made public the details of what had gone on, Conservatives forced out of office and Mackenzie came to power

From Mackenzie to Laurier

  • Mackenzie never understood Macdonald’s patronage
  • a failure as a politician because he was not a good practitioner of the art of patronage
  • e.g. Mackenzie refused to purge the civil service of the Conservative’s appointees
  • as a clear Grit he stood for reform
  • clash between reality and values
  • Mackenzie annoyed and alienated his supporters who did not have access to the spoils of power because he was too honest
  • he occasionally gave into the pressure of party members
  • the result of his ambivalence was that the Liberals failed to establish themselves with a national presence and they lost the next election
  • only under Laurier when the Liberals adopted the same principles as the Conservatives in terms of patronage that they emerged as a national party
  • remarkable similarity between how the system worked under Macdonald and Laurier
  • under Laurier, patronage minister to Quebec (?) Israel Tarte coined the phrase “Elections are not won by prayers alone”
  • use of patronage with economic boom in the West established the party in the West
  • integrate newcomers into the political system, specifically the Liberals, e.g. rural communities in the Prairies
  • patronage system extended to the provinces, e.g Ontario under Mowat

The Civil Service and Reform

  • the Canadian case was the worst of all possible outcomes in a sense: in the US, you have at the heart an aversion to government; and in the UK, patronage appointments increasingly passed to a more independent civil services and it is less of an organizing principle in contrast to emerging ideologies like the rise of the Labour Party; but in Canada you have an active government involved in economic development with two parties without ideological differences driving them, all that remains is patronage
  • the civil service is a stable career, you need ties to a political party to get there
  • reform was a long time coming
  • civil service reform became an issue in the US after the assassination of Garfield by a man disappointed by his lack of patronage appointment, list drafted of civil service jobs whose applicants had to be examined, UK did the same thing
  • Royal Commission investigated civil service three times, drew attention to the evil of patronage and recommended reforms, some were adopted but they were piecemeal and easily bypassed, political parties saw patronage as crucial to their operations and were unwilling to give it up
  • American criticism of the spoil system influenced Canadian thinkers as did the British example especially by Loyalists to the Empire
  • growing pressure also result of scandals
  • in 1907, the Conservative leader Robert Borden presented the Halifax Program which proposed the curtailing and in some cases ending of patronage, he was not a fan of party politics, thought patronage was a distraction, proposed that the civil service be professionalized, examination for civil service posts 
  • Civil Service Amendment Act 1908 adopted by Laurier, more impressive on paper, only a few cosmetic reforms
  • despite Borden’s misgivings, in 1911, he was elected and did not dispose of the tool because party argued it was essential, led to tension within the party
  • did not really end until the War, the War Effort called for efficiency, the patronage system was undermined, the formation of the Union Government in 1917 was a coalition of Conservatives and pro-conscription Liberals, aspired to non-partisanship and the effective war effort, patronage under attack 
  • Union created new rules including sharing the spoils, civil service depoliticized by the Civil Service Act of 1918 which cut the legs out from under patronage, this was the beginning, it curtailed the use of patronage in what had been a wide-open area
  • conversely it helped to increase patronage at the provincial level because there were no reforms made there


  • on the one hand, it helped to create and maintain political stability which was essential for the success of Confederation
  • for a long time it helped parties to attract and remain supporters, solid base
  • consistent with Allan Gordon in the course pack
  • national parties united by patronage used by leaders to run their electoral machines and break down local interests and integrate them into the Canadian system
  • parties were not representative of a region or religion or creed, they expanded to serve all
  • this achievement is somewhat deceiving
  • reciprocal arrangement between politics and business undermines Gordon’s theory
  • entrenched a political culture which was designed to neglect problems of cleavages, it encouraged the persistence of localism in a way, patronage made every local political organization jealous of its territory and suspicious of outsiders, created hard-working local constituency organizations linked to Ottawa but divided outsiders, more interested in their ridings and the patronage dispensed there
  • internal domestic peace
  • avoidance of serious debate on issues that fundamentally divided Canadians like linguistic debates
  • system of buying off support was convenient for politics but not Canada
  • as project of national integration continued, the parties that had used the benefits of the patronage system were increasingly unable to use patronage to mend political cleavages
  • patronage was its greatest strength and its greatest weakness of the post-Confederation party system

Women’s Suffrage

  1. Women as political beings before suffrage
  2. The suffrage campaign
  3. What happened in Quebec

Enfranchisement/Suffrage – the right to vote

Citizenship – rights, responsibilities, obligations, identity

Before Women had the Right to Vote (1880-1940)

  • still considered themselves citizens
  • suffrage debate began in WWI
  • didn’t emerge out of nowhere
  • women were political actors, activists even before they had the formal right to vote
  • an action becomes political if the intention is to use any form of power to govern, shape, reform the society in which you live
  • she studied 12 womyn in Montreal of the upper class (resource-rich)
  • transition was from a very private, enclosed sphere to a much more public sphere while insisting in the rhetoric of the day
  • one discourse was the idea of separate spheres (public and private) in parallel with the idea that men and womyn have different natures and so exist in a particular sphere, e.g. womyn are naturally maternal and moral so they raise the family at home
  • womyn used the maternalist discourse to launch themselves out of the private sphere, said they had talents and natural abilities that men didn’t
  • at this time Canada had urban slums, rising infant mortality…womyn used this argument to argue that womyn were needed to “mother” society
  • we think of it as an equal rights campaign but this was not always the argument used
  • womyn’s involvement in charity in Canada took off in the early to mid 19th century, a religious task, moral, a safe way for womyn to fill their spare time
  • some people are double-dipping, some people are being missed, some people aren’t being helped by it, talk about how to improve the system
  • charity was impulsive and unorganized (giving money on the street) whereas philanthropy was well thought out, got to the root of the problem (matching skills to jobs)
  • 1893: World Fair in Chicago, a model of a modern city, industrialization will lead to great things, for the first time there was a womyn’s pavilion, womyn were involved in all kinds of aspects of the Fair, first meeting of the International Council of Womyn, all female visitors were invited to hear its vision of womyn being a powerful force
  • several Canadians at this meeting went home very fired up
  • coincides with the arrival of a new Governor General whose wife was very powerful and active, went on a trip across Canada, energetic, was the president of the International Council of Womyn, got the National Council of the Womyn of Canada underway
  • the Council was an umbrella organization
  • shows that womyn saw themselves as citizens, as political actors, who wanted to take part in the development of Canadian society
  • a philanthropic organization that became political
  • one problem was how womyn were being treated in the factories, brought to the attention of the Council, which set up a committee to study it by going into the factories and speaking with the womyn and the managers and experts, decided womyn should have a minimum wage, limited hours, should have stools to sit on, etc. but the big idea was womyn factory inspectors 
  • can’t have a bill introduced in parliament
  • strategy: invite MPs to dinner or tea and bring up the issue, organize public events like Harvard experts to speak about the issue, held meetings with premiers, were successful
  • this is a joint anglo-franco effort before WWI, the elite middle class learned both languages
  • they’re gaining political experience and support networks
  • power in numbers

Beginning of the Suffrage Movement

  • boring relative to the British movement, had a different shape, these womyn considered themselves ladies and used logical arguments, politicking, press coverage
  • most of the womyn did not use an equality argument, actually used mostly the maternalist argument, womyn bring different qualities to society
  • the vote was the means to an end, the end being prohibition
  • 1867: property-owning males over the age of 21
  • Toronto Womyn’s Literary Club, 1876, intentionally misleading name, discussion was of how to get the vote, rename themselves the Womyn’s Suffrage Organization and around the turn of the century make their mission known
  • originated in large urban centres, e.g. Montreal and Toronto
  • but the first places to be successful were small towns and rural settings especially in the Prairies where they got the provincial vote early on under Liberal governments
  • some explanations: the Prairies were a place of significant immigration particularly from Nordic countries where womyn already had the right to vote; the frontier mentality, rough living conditions, womyn were in the field working just as hard as the men, sense of equality
  • 1918: womyn get the right to vote in federal elections
  • as nurses, civilians, factory workers, womyn proved their worth in WWI, they were fighting on the home front, did they part, gained a lot of respect
  • PM Borden (the Union government) gave them the vote to pass his conscription policy, starting with expanding the franchise to all those effected by the war, e.g. the wives of men who were fighting or who had fought overseas, female nurses


  • 1791: the Constitutional Act stated that all land-owning persons were allowed to vote, did not exclude womyn, first place where womyn could vote, until 1849 when it became exclusive
  • suffrage movement began in urban centres (Montreal) in contrast to rural Quebec which was more traditional than the rest of Canada, more religious
  • WWI was a difficult period for anglos and francos
  • 1922: really gets underway, 400 womyn meet with Premiere Tashrow (?), but they were dismissed, he had been presented with a church-organized petition the day before which protested enfranchisement
  • St-Jean in 1927 transformed it to a working class phenomenon, made progress in the 30s, until DuPlessis (Union Government), very conservative and traditional, has no time for womyn’s suffrage, gets the Liberals warmed up to the idea
  • 1939: womyn invited to the Liberal convention
  • coincides with start of WWII
  • argument used held that if womyn’s suffrage was endorsed, conscription would pass, and the governments could work together
  • when the Liberals were elected, they granted the right to vote
  • France didn’t grant the right to vote until 1942, after Quebec, French heritage cited as a reason for holding out, in contrast to Britain
  • January 24, 2007

The ‘National’ Question on the Eve of Crisis

Conference – MacKay article, readings for this week

Main Arguments:

  1. Canada’s two post-Confederation national parties owed their success to bridging the regional and cultural differences between Canadians. 
  2. Consistent with the broader international trends of nationalism and imperialism, however, both the Conservatives and the Liberals found it increasingly difficult to bridge Canada’s cleavages.
  3. A series of interrelated disputes throughout the late 19th and early 20th century related to “national integration” and questions regarding Canada’s “national” character undermined the two main political parties and led to the mergence of potential challengers. This was the precursor to the collapse of the post-Confederation party system that would occur during the First World War.

The National Question: Background

  • local and personal ties were at the heart of traditional, rural, agrarian societies but they began to break down in the context of liberalism, capitalism, industrialization
  • nationalism replaced it, sense of belonging to a greater collectivity, in a period of profound social upheaval
  • emerges first culturally: every nation had a distinct language, history, worldview, culture of its own that needed to be preserved
  • lead to political nationalism: every nation should have a sovereign state, the nation would be governed by members of their own, the cultural expression of a people, the key to survival and success
  • e.g. unification of Germany, of Italy, the decline of the Austrian Empire and the Ottoman Empire, Irish nationalism, American nationalism and its Civil War in the 19th century 
  • intense territorial competition reflected in colonialism, done on behalf of the nation
  • Canada desired a separate existence from the States, what was the Canadian nation, two culturally distinct nations living in one state, self determination, nationalism, the concept of a nation-state, how can nations share one state
  • Lafontaine and Baldwin proposed a biracial nation that overcame cultural differences
  • Macdonald said no party could endure without being “French-ified”
  • Chapleau believed that French-Canadien interests would be best served within Confederation, it is necessary to speak with one voice
  • Laurier made the Liberal Party the dominant party in Quebec 
  • keep economic expansion in the forefront of voters’ minds, the one thing that the French and English could agree on, distract the groups from their linguistic and religious differences
  • homogenous parties (one religion, one ethnic group) not developed
  • the political parties bridge the divides, power machines, don’t necessarily stand for anything

The Provincial Rights Question

  • the relationship between federal and provincial
  • system meant to provide part of the answer to the National question: two levels of government, provincial government to take care of cultural issues and federal government to address state issues
  • in practice, questions raised immediately about the power relationship between French and English across the country
  • Macdonald preferred a strong national authority to consolidate Confederation, saw provinces and their bids for power as rivals, his centralizing efforts provoked reactions at the provincial level, reflected in the growing strength of political parties at the provincial level
  • e.g. Ontario Liberal Party, led by Mowat, considered the father of the provincial rights movement
  • in the early years, Conservative Party’s dominance in Quebec kept its national ambitions in check

Worldviews Compared: Imperialism, Anti-Imperialism, Nationalism

  • Canadian Imperialism: centred chiefly in Ontario, advocated reform of Canadian nationalism, goal was independence from the States, best achieved by having strong ties with the British Empire, not in a subordinate status, but as a partnership (equal partners), Canada would be an active contributor to imperial defence and have a saying in the running of the Empire, anglo-centric, Ontario-centric, this ignored French Canada’s desire for autonomy and detest for the Empire
  • Anti-Imperialism: French and English, said imperialism was at odds with nationalism, couldn’t be reconciled, saw the imperialists as a reactionary remnant of colonial-minded individuals, argue that Canadian imperialism could not be reconciled with independence, largely 
  • Nationalisme: French Canadien nationalists, strong commitment to Canada’s defence, Canada was either independent or part of the Empire but not both, concerned about the status and rights of French Canadiens, some were Quebec-centred and some wanted a French presence everywhere, the awareness of being a minority
  • result is a series of disputes between these rivalries

The Northwest Rebellion

  • 1885
  • rhetoric in English Canada, especially from Ontario Imperialists, treated the rebellion as a test of Canada’s nationhood
  • Metis cast as enemies of Canada and its control over the northwest
  • Ottawa’s response (execution of Louis Riel) alienated French Canadiens
  • half of Quebec Conservatives either voted in support of or abstained from a motion put forth that condemned the execution
  • Trudel: “The nation’s duty compels us to break the tradition of the past 20 years”
  • Mercier was a member of the Parti Nationale, an effort to bring together Quebec Conservatives and Quebec Liberals, put the French interest ahead of the party interest, Mercier called for a sacred union between French Canadiens
  • a second Parti Nationale is a provincial party, those who opposed Macdonald’s handling of the Northwest Rebellion, ride a nationalistic wave to victory in the election, in office they were notable because Mercier used it to strongly serve the notion of political autonomy for Quebec, challenge to Ottawa’s authority, but falls from power in 1891 and the Liberals return to power
  • the French Canadien nationalist cause endured, the Northwest Rebellion was the beginning of the end for Conservatives, Liberals increasingly had to seemingly favour autonomy for Quebec
  • the rise of the Parti Nationale is indicative of growing nationalist tensions between the English and French, who has power, who will lead

Linguistic and Religious Rights (pre-1900)

  • Equal Rights Association formed (ironically named)
  • by the 1890s, movements to extinguish French education and linguistic rights outside of Quebec, e.g. Manitoba, Ontario, and New Brunswick
  • Manitoba had been founded on an equal basis, equal government funding for French and English, but migration from southwest Ontario (Clear Grit country) upset the balance, the Liberal government halts funding to Catholic schools
  • Conservative government under pressure to intervene in Manitoba’s government, controversy, accelerated the Conservative Party’s decline in Quebec, helped propel the Liberals into power, able to bridge linguistic/cultural/religious cleavages 
  • Laurier, rather than Ottawa restoring rights, looked at the numbers, pragmatic, provided for instruction and bilingual instruction where the numbers were
  • Laurier Liberals seized power at the height of these French-English tensions, reinforced by the imperialist world views

The Boer War and Rise of the Nationalism

  • imperialist war
  • French Canadiens absolutely opposed
  • English demanded participation
  • Laurier’s government at risk of falling, would be replaced by an Imperialist government
  • how to offend the least amount of people?
  • sent only 1000 soldiers to South Africa, but Ottawa will only pay for the transport and clothing, after that Britain picks up the tab
  • upcoming election
  • trying to preserve national union
  • of course, both sides too it as either “too little” or “too much”
  • Henri Bourassa was a predominant Liberal critic, accused him of caving, setting a precedent for participation in Britain’s colonial wars, he resigns in protest, but it immediately reelected as a national Liberal, an advocate of French Canadien nationalism and a critic of imperialism, a French Liberal
  • Laurier re-elected because they were still a better option than the imperialist Conservatives

Linguistic and Religious Rights (post-1900)

  • League Nationalist established, for provincial autonomy (Quebec’s) and make sure that Canada was truly a partnership between French and English
  • a movement, not a party
  • Bourassa not a big fan of parties (the dictates of party discipline)
  • the League Nationalist supports independent candidates or party candidates who support their ideals 


  • calls for a reconnaissance rather than a synthesis
  • not just particular events, fragments
  • sense of general patterns
  • tracing Liberalism from its inception to Neo-Liberalism
  • Liberalism the dominant ideology by adopting, morphing
  • connect the dots to get an idea of what Canadian Liberalism is
  • the older approach is simplistic, this would be more sophisticated
  • Gramscian concept of “passive revolution”, e.g. Harper’s announcement of funding for alternative fuels 
  • passive revolution vs. the great Canadian compromise as explanation for Confederation
  • Liberalism is mostly about individual rights
  • civic humanism: organic social order, a competing ideology emerging as the ancien regime was collapsing, popular in the UK, US, France, a concept of the relationship between citizen and society recalling ancient approach, e.g. Greece, rather Conservative with Liberal aspects, hierarchical 

The Suffrage Movement

  • the vote not granted out of the goodness of their heart but to preserve the order
  • Liberal ideology reflected in recognizing women as citizens when they are property owners, originally debated in 1867 or thereabout, but shot down because giving women a voice would undermine married women and possibly prevent marriage altogether
  • Quebec argued this should be a provincial decision rather than a federally imposed one
  • motivated by conscription
  • Arthur Meighen’s quote about giving the vote to women and not alien men show what he judged to be grounds for Canadian civil rights, strategic, strict definition of Liberal individual
  • the vote a means to an end
  • political parties as gatekeepers, e.g. Person’s Case
  • women didn’t rush the gate, act as a united force, little discernible change on the ground

Linguistic and Religious Rights (post-1900)

  • The Autonomy Bills established Manitoba and Saskatchewan
  • allowed for separate Catholic schools
  • but Laurier retreated under pressure, new legislation severely curtailed linguistic and religious schools
  • Manitoba School Act 
  • Bourassa, etc. fuelled their nationalist fire
  • pressure that the Western Liberals imposed and that the Nationalists in Quebec imposed shows that the Laurier government had an even more difficult time bridging Canada’s divides
  • Laurier Liberal’s difficulties only grew with international developments

The Naval Debate

  • 1909: Anglo-German rivalry provoked a naval arms crisis
  • New Zealand gives UK cash to buy battleships, Australia decides to build its own navy (take care of its own defence in order to relieve pressure on the Brits)
  • what should Canada do?
  • debate: assist the British, respond to imperialist sentiment, but now in a way that would anger the Nationalists in Quebec or the imperialists
  • Borden supported Laurier establishing Canada’s own navy, but leaving the door open to making an emergency cash contribution to the Brits if needed (Australia and New Zealand combined)
  • but this bipartisan cooperation evaporated…divisions with the parties and country
  • Borden faced severe criticism from Conservative imperialists in Ontario who said that ‘This is an emergency, they need money, they have the expertise, let them build the ships’ whereas Canada’s own navy would be inferior
  • Monk saw both options as entangling Canada in the empire
  • Borden breaks with Laurier, calls for an immediate cash contribution and a Canadian voice in determining imperial defence and as a way to respond to the anti-imperialists says that Canadians should be able to express their voice on the issue, i.e. a referendum before a permanent policy is adopted
  • Naval Service Bill, 1910, controversial by imperialist and linguistic lines
  • English Canada: Laurier’s Navy a betrayal of the imperial cause
  • French Canada: another betrayal of Canada’s self-governance and autonomy, Ottawa doing London’s bidding
  • Bourassa becomes a rival to Laurier’s leadership in French Canada, the pragmatic Laurier to the more doctrine Bourassa 
  • Bourassa founded Le Devoir in 1910, mouthpiece for the Nationalist cause

The Reciprocity Election

  • calls for reciprocity and free trade (Laurier has still not delivered)
  • Liberals go for “restricted reciprocity”: reciprocity in the agriculture sector, but the protectionist tariff to remain in effect for the manufacturing sector, a marrying of the best aspects of the national policy but answering the grievances of rural Canada, America agrees, very popular initially
  • concerns about the rate of North America continental integration, what does this mean for the future, especially the relationship with London, how close is the US
  • unrestricted reciprocity means the American takeover of Canada, trade between Canada and the US (north-south rather than east-west) would reign, national sovereignty undermined
  • “The Toronto 18”: claimed that they previously supported Laurier, had a vested interest in the national policy, declared they were opposed
  • Clifford Sifton bolted from the Liberals 
  • opponents appealed to a higher principle: imperialism, Laurier was depicted as anti-imperialist and therefore anti-Canadian, that by increasing ties with Americans he was threatening Canada’s independence 
  • Summer 1911: Laurier facing opposition, an obstructionist parliament withholding approval of the legislation, he calls an election
  • quickly becomes a referendum on the Liberals foreign policy, growing attacks of reciprocity in English Canada 
  • a crucial alliance between the imperialists and the anti-imperialists
  • Quebec Conservative Party was beginning to detach itself from its federal cousins, tied to a party dominated by imperialists, considered anti French-Canadian
  • an opportunity created because the Quebec Conservatives began to make common cause with the League Nationalist to gain votes in Quebec
  • Borden begins to think of Bourassa as a possible solution, to Borden the thought was that maybe a joint effort between the imperialists and anti-imperialists could challenge the Liberals
  • the Borden Conservatives refused to run candidates again Bourassa’s Nationalists
  • Liberals vs. Nationalists in Quebec
  • Bourassa wanted to cooperate to defeat Laurier and his naval policy, but this did not mean that he wanted Borden’s naval policy, he wanted to be the kingmaker, deny both the Liberals and the Conservatives a majority, use this leverage to bring about the changes it wanted
  • but a Conservative majority is elected, 118 seats, the Nationalists win only 16 seats, far short of the balance of power
  • looks like the torch was just passed back again
  • but really marks the end of the post-Confederation system, Borden achieved victory through his alliances, but not a solid foundation for a governing coalition in the long run, base still in Protestant Imperialist Ontario
  • Conservatives try to pass their emergency cash contribution, 7 Nationalist Conservatives from Quebec saw this as a betrayal of Canadian self-government, Liberals reenergized, block the legislation that the Conservatives try to pass using their majority in the Senate
  • growing strength of French Canadian nationalism
  • on the eve of WWI, two national parties responsible for Confederation, increasingly victims of the efforts that their actions for consolidation had provoked, victims of the question of Canada’s national identity and destiny, neither party in the position to claim that it was capable of bridging them, events overseas about to heighten the significance of the nationalist question (Empire, power relations between French and English) 

especially aspecially 

The Great War and Crisis in Canada’s Political System


  1. Conflict abroad caused conflict at home. The wartime clash between imperialist and anti-imperialist worldviews, and accompanying cultural tensions, had far-reaching consequences for Canada’s political parties.
  2. The Liberal disintegration, the emergence of Union Government, and the results of the 1917 election brought the post-Confederations party system to an end. The relative political stability since 1867, characterized by the lengthy times in power of two inclusive, pragmatic, pan-national parties, disappeared
  3. The triumph of Unionism represented a victory for the imperialist-nationalist vision for Canada; as such, it ultimately contributed to disunity, owing to the marginalization of French Canada, which had long-term implications for Canadian party politics.

Union Sacree? Canadian Politics from War’s Outbreak to 1916

  • Laurier gives his support to the battle cry
  • coming from the leader who had consistently preached ‘limited participation’ 
  • like the Boer War and the Naval Debate, it appeared Canada would enter the war, even Bourassa gave his qualified support
  • the fact that the cause was just (Germans had betrayed Belgium’s neutrality, Britain was in danger); participation was voluntary (Borden promised conscription would not be enacted); the assumption that the war would be short (over by Christmas); the fact that the national unity within the House of Commons was stronger than outside the House (masked divides)
  • “Union Sacree” put to the test, as it became clear that the war would not be over by Christmas, increasing pressure from Britain, massive Canadian casualties, voices of dissent, breaking of bipartisan unity, series of patronage scandals to boot
  • growing concerns about the Conservative Party’s fortunes, beyond declining support in Quebec, increasingly unpopular across the country, by the end of 1916 only in control in Ontario
  • this prompted Borden to propose the extending of parliament, Laurier agrees to one more year, neither of them wanted to go to the electorate during the war, partisanship only increased, the façade that existed in 1914 collapsed

The Collapse of the Union

The Battle over Language

  • renewed questions over the power relationship between French and English over war
  • 1912: Ontario government introduced Regulation 17 which severely curtailed the use of French as the language of instruction within Ontario schools, limited the teaching of French to the first two years of primary school, Franco-Ontarians outraged, violation of the Canadian Constitution, the Nationalists supported the Franco-Ontarians, an attempt of assimilation, marginalization
  • Borden refused a petition that called on Ottawa to disallow this law, said education is a provincial responsibility, the federal government is not going to interfere
  • matter brought before the House of Commons, divided along linguistic lines, French Canadians supported the resolution to veto the law

Conscription and the Liberal Collapse

  • call for 500 000 soldiers from a population of only 8 million 
  • things not looking good for the Allies
  • Americans introduced a draft, put pressure on Borden to do the same, a vital member of the British Empire, but political difficulties like during the Boer War
  • needed Liberal support, Laurier’s support, through the formation of a coalition government that could enact conscription
  • Laurier first rejects the offer on the grounds that by 1917 a Liberal return to power seemed in sight, voters unhappy with the war effort, the one-year extension up, warned that the English population was not fully in favour of conscription anyway, “The voice of Toronto is not the voice of God”
  • Bourassa’s support for the war effort had eroded after Resolution 17
  • James Massey criticized Quebec for its low enlistment rates and questioned its commitment to Canada
  • Laurier does not want to leave the field open to Bourassa, rejects Borden’s offer, asks for the national referendum on the issue, buy him time to build a coalition
  • during the Regulation 17 debate the Liberal caucus had split, the Western Liberals voted with the Conservatives while the rest voted with Laurier (Ontario only barely)
  • John Wilson openly supported the Conservatives, wanted them to become the national party of English Canada, only they could be trusted with the future of the country, the British population was the only true Canadian population, an imperialist, Quebec had forfeited their right to the nation
  • sections of Liberal caucus tired of Laurier’s leadership, argued Canada needed a new liberalism to better respond to industrialization and urbanizaiton, came from Ontario and the West, advocated social programs like old age pensions and employment insurance and womyn’s suffrage and prohibition
  • Laurier feared these new Liberals were trying to impose a new mode on the Liberal Party, trying to marginalize French Canada, undermine the Liberal claim to being a pan-Canadian national party
  • Military Service Act split the Liberals on linguistic lines, the anglos sided with the government overwhelmingly, only 7 supported Laurier’s call for a referendum on conscription
  • result was the Liberals could no longer claim to be a binational party
  • MPs had more power back then, less whipped
  • English supported conscription, French opposed it, beginning to see the breakdown of the system, polarization along ethno-linguistic lines

The Rise of “Unionism”

  • Why did it take so long to form a coalition government?
  • 1. Laurier’s bipartisan pledge, no need for coalition, the parties seemed to agree at the onset of the war
  • 2. Self-interest, the Conservatives are in power for the first time since 1896, don’t want to share the spoils of power, on the other side, Laurier was more charismatic than Borden and believed he would overtake them, the Conservative weakness would allow the Liberals to return to power
  • 3. The scope of the crisis was not large in the early years, the war would be over soon
  • this had all changed by 1917, concern became how to manage the war effort
  • the Ontario caucus of the federal caucus begins to pressure Borden to form a coalition with the “patriotic wing” of the Liberal party
  • John English (historian) describes the establishment of the Union government as the result of the efforts of an English-Canadian nationalizing elite centred from Canada’s urban centres especially Ontario to bind together an increasingly fragmented Canada
  • mid-October 1917: 12 Conservatives, 9 pro-conscription Liberals form the cabinet
  • 1917 election results: essentially a one-party election, Liberals in Quebec, and the Unionists in the other provinces, but the vote was closer than the seat distribution suggests, Quebec returned anti-conscription Liberals and the rest of Canada returned pro-conscription Unionists 
  • Laurier Liberals were now anti-conscription, largely French-run
  • neither party could claim to be “national”
  • Wartime Elections Act disenfranchised thousands of immigrants who would likely have voted Liberal and the enfranchisement of womyn was designed to support conscription
  • Military Voters Act allowed for soldiers to vote in any riding, encouraged to case their ballot in close ridings
  • so the victory goes to the imperialist-nationalist vision of Canada and the Unionist cause
  • it had already come from within, a marriage of convenience

The Disunity of Unity

  • gradual disintegration
  • died with Borden’s resignation
  • new leader tried to keep up the façade by renaming the party the Liberal-Conservatives
  • the national government that Unionism represented ultimately meant the domination by the arrogant majority for too many Canadians
  • Laurier dies in 1919, Bourassa increasingly seen as depassé
  • unity is a pipedream
  • Nationalists increasingly focus on the Quebec nation
  • implications for the two mainline parties
  • Laurier’s anti-conscription meant Quebec would stay Liberal
  • King was seen as a supporter of Laurier, wins the leadership, but party had been reduced in its seats
  • by the time the Union government came to an end not one provincial government was controlled by Conservatives
  • Conservatives identified with the unionist, pro-conscription cause by Quebeckers

Challenging the Establishment? Part 1: A Progressive Response

Main Arguments:

  1. The rise of the Progressives may be understood as the manifestation of a widespread rejection of “politics as usual”, combined with an agrarian reaction, centred especially in (but not limited to) Western Canada, against the national political and economic system build by the Conservatives and Liberals;
  2. The Progressive Party’s greatest strength was in a sense its greatest weakness: its populist, mass-based origins, meant it ultimately failed as a party, due to its divisions among its members over its raison d’etre and its role in the system of Canadian party politics, against which it was reacting;
  3. The legacy of the Progressive Party, however, lived on in terms of encouraging the two traditional parties to be more democratic. Even more significantly, the rejection of “politics as usual” and sectional discontent would re-emerge in the 1930s and beyond in new challengers to the Liberals and Conservatives, confirming the demise of the post-Confederation two-party system.

The “Progressive” Challenge to Party Politics

  • the League Nationalist is an example of a popular mass-based approached, the emergence of extra-parliamentary parties
  • the reaction of groups and individuals against the national establishment, e.g. womyn’s attempt to gain power in the political system and the competition between English and French Canadians
  • understand that this is the product of disillusionment with the existing political order, embodied with the demand for reform
  • American Progressives strongly opposed corruption, called for political reform, believed that the status quo was corrupting democracy, efforts to reduce the power of political machines and party bosses through innovations of direct democracy, e.g. the recall, the initiative, primary elections
  • Canadians saw government as advancing the interests of the party and its friends, not the national cause, inspired by Americans, wanted greater control over their representatives and greater input
  • Canadian Council for Agriculture called for the public ownership of utilities, graduated income taxes, Senate reform, direct democracy, and proportional representation in 1916
  • movement seen in number of independent candidates in Saskatchewan’s provincial election in 1912 which increased threefold
  • NPL wanted representatives to be accountable to their constituents
  • 1913: WJ Rutherford called for a new political party that would make politics “a holy thing” in Canada
  • people disenchanted with the two-party system
  • Canada becoming more urbanizae


  • seen as a bit of an outsider, from Nova Scotia, felt politics as usual was not working, didn’t want to be dominated by the Conservatives
  • reached out to the progressives to build a new coalition, e.g. the suffragists
  • pragmatism, compromise, moral order the new way
  • Union government argued that is embodied all interests, no need for another party
  • John English (historian) argued that Borden saw unionism as more than a political party, it was a political movement, popularly based, to lead to a non-partisan upheaval of the way politics was done
  • promised to abolish patronage

The Agrarian Revolt and Western Discontent

  • the rise of the Progressive Party was also a reaction, a sectional revolt
  • the other part of the explanation for its rise
  • American farmers had revolted, felt that the two parties were not responding to their needs, lead to the establishment of the American Populist Party
  • in the decade after WWI, farmer’s parties established in Scandinavia and Eastern Europe, sense that the rural community was being marginalized in rural life
  • politicians of Canada envisioned the West as the hinterland of Toronto and the East as the hinterland of Montreal
  • Western settlers who purchased land from the Canada Northwest Land Company, purchased tools from another company that was also protected by the government, higher costs
  • National Policy tariff 
  • economically subservient condition combined with the precarious conditions of the wheat economy fuelled resentment, Western Canada’s needs ignored, kept in a state of dependence
  • democratic wakeup: settlers arriving in Alberta are predominantly Americans who experienced the agrarian revolt there, Jacksonian Democracy; in Saskatchewan the settlers are predominantly Brits who experienced uprisings; in Manitoba they are south-western Ontarians where the notion of agrarian democracy is well advanced through the Clear Grit ideas
  • this contrasts to the East, which was more Whig-ish
  • Western discontent growing as debt of farmers increasing, the low international price of wheat not increasing as quickly as manufactured goods, Liberals not moving on  reciprocity (which they wanted: free access to the American market and cheaper goods through free trade or freer trade)
  • farmers began to organize, inspired by the American example
  • 1905: first farmer’s grain market established
  • 1911: Western concerns on the national agenda, seemingly, after Laurier toured and saw how angry farmers were, Liberals finally move on reciprocity, but they were subsequently defeated
  • farmer’s influence seen as waning, they are marginalized, central big business dominates
  • this increased during the war, Westerners initially hoped that the Union government would be more national, end patronage, show democracy, the promise that conscription would not be applicable to farmers (food an essential part of the war effort)
  • couple months after election Germans have a breakthrough on the Western front, crisis, Unionist government revokes the exemptions granted to rural Canadians, 1918
  • and still no action on the tariff, if anything it was increased to help the war effort
  • and thousands of farmers had been disenfranchised by the Wartimes Election Act
  • at the end of the war, drought hits the West, especially southern Alberta and at the same time wheat prices collapse, so they are harvesting less wheat and getting less money for it
  • rapid post-war inflation, costs of living and doing business increasing
  • tariff issue takes on even greater resonance
  • “The New National Policy” – calls for free trade with the UK and US
  • Union government caught in the middle, opted to delay any action on the tariff 
  • Thomas A. Crearar, Western Liberal, resigned over it
  • result an emerging third-party challenge

The Farmers United: The Provincial Level

  • rural Ontario furious at the revocation of the conscription exemption and its seeming declining influence in provincial politics
  • UFO established, United Farmers of Ontario, with the United Farm Womyn and United Farm Young People
  • Oct 1919: UFO wins the most seats in Ontario, builds a coalition with labour members, under the leadership of E.C. Drury (from Barrie!?) forms a government
  • United Farmers of Alberta MP wins in a provincial bi-election
  • UF of Manitoba allows its members to organize, win a plurality of seats in the next election
  • Saskatchewan Liberals closely ally with the Sask grain growers association
  • Henry Wise Wood, UFA leader, feared losing control of it, just wanted it to be a pressure group to lobby the parties not a political party itself, but under pressure agrees to run some candidates, groups to elect representatives rather than individuals, e.g. lawyers and farmers elect representatives, only farmers can be elected by the UFA, they sweep to power, but Wood refuses to lead the party, doesn’t want to be personally involved in politics
  • success as provincial level followed by success at the national level

The Emergence of the National Progressive Party

  • Crerar insists it is not a farmer’s party, but for all who desire to see morality, reform, etc.
  • a distinct agrarianism in their policies, e.g. central demand was tariff reform, and easier access to credit for farmers, provincial control over national resources, more services to rural areas, abolition of party discipline and patronage, direct democracy
  • did not campaign as a national party in 1921
  • Liberals and Conservatives in a state of disarray in the West, King tried to pose as a friend of the farmers and accused the Progressives of causing class tension, Conservatives advocated the National Policy
  • in 1921, voters rejected both of the old parties, Conservatives won 50 seats, Liberals formed a minority, the Progressives won 25% of the popular vote and 64 seats to be the second largest party in government, however it was short-lived due to divisions within the new party and its raison etre, was it a party or a popular movement or…
  • the Manitoba wing led by Crerar favoured a pragmatic course of action, saw the Progressives as disbanding once the King government granted some concessions
  • Alberta argued progressivism had to fundamentally challenge the political establishment, break with the past, much more principled/doctrinaire view
  • serious implications
  • they seeded their role as Opposition to the third-place Conservatives
  • did not form a coalition
  • they lost their two best means to directly influence the political process
  • King dismisses the farmers, the progressives as “Liberals in a hurry” and only introduced sufficient concessions to keep himself from being defeated, e.g. reduced the tariff on farm machinery
  • the Conservative Quebec wing totally opposed to forming a coalition with the Progressives, no alliance formed, tricky balance

Progressive Decline

  • party split in 1924 over the question of supporting the Liberal budget
  • pragmatism triumphed: Forke voted against an amendment that would have brought established progressive policy into law in order, King government would have dissolved, Conservatives might have come to power
  • 6 left the caucus to sit as independents
  • no money, no national organization
  • only 24 Progressives (West of Ontario) elected next election
  • Liberal-Progressive alliance to keep Liberals in power
  • 1926: only 9 Progressives left, disappear over the following years as the organized farmer’s protests of the 1920s faded, internal divisions, return of prosperity, some drifted to the Liberals, retired, or sat as independence
  • 1923: UFO fell from power in Ontario
  • UFA out by mid-1930s, the last provincial party
  • 1926 resulted in the return of majority government, marked the completion of the transformation of Canada’s party system that had begun with the Union government
  • Liberals and Conservatives had rallied support, extra parliamentary support, used conventions to elect leaders (small nod to democratic ideal)

Challenging the Liberal Order, part 2 – The CCF and the Left

Main Arguments:

  1. The rise of the CCF followed a long tradition of diverse, but ultimately ineffectual political activism from Canadian labour. It was only the profound dislocation of the Great Depression that led to the emergence of a viable, national left-wing party;
  2. Beyond its socialist aspects, the CCF was a manifestation of the same agrarian populism and sectional resentment that gave rise to the Progressives;
  3. While the CCF presented a national vision challenging the political establishment, its early record was less spectacular than that which the Progressives, or its Prairie rival, the Social Credit Party experienced. Moreover, there were serious questions about how French Canada fit into the CCF’s alternative “national vision”.

Background – The Rise of Organized Labour and Socialism

  • the belief was that legal equality espoused by the Liberals was insufficient without social and economic equality
  • the Communist Manifesto argued that capitalism would collapse
  • rise of a French socialist party in France
  • first Labour MP elected in Scotland (Keir Hardie)
  • 1923: British Labour Party formed the government
  • the rise of socialism and organized labour in Canada resembled the situation in France and Italy: low percentage of organized workers, slow formation of trade unions
  • movement was divided: in Quebec, competition between the TLC and the Catholic movement; Western labour movement was more radical and resented American influence in the TLC
  • tried to form One Big Union, idea was that all workers (skilled or unskilled) would be banned together, like International Workers of the World
  • Trade Unions Congress (TUC)
  • Trade and Labour Congress (TRC)

Economic Upheaval and Labour Activism in Canada

  • after WWI, labour unrest is universal, vicious cycle of economic disruption, hit the European and North American economies in particular, unemployment and inflation
  • e.g. 1918: $1.60 to purchase what $1 purchased in 1913, worker’s wages not keeping pace, standard of living declining
  • 1919: week-long Winnipeg General Strike, set off sympathy strikes, class tension, but some dismissive attitudes
  • radical social gospellers, e.g. Woodsworth and Irvine, thought that church-based social reform was too conservative, not going far enough

Labour: The Political Reaction, 1890s-1930

  • an incentive for labour to enter into electoral politics, built on a lengthy but ineffectual history of labour in politics, e.g. Socialist Party of BC held the balance of power in the BC legislature in 1903, the formation of the Socialist Party of Canada, in Ontario in 1919, 11 labour MPs elected
  • labour unions try to establish party at provincial levels across the country
  • farmer/labour coalition form the opposition in Nova Scotia
  • on the federal stage, 22 Labour candidates in 1917 run, but none elected, poor planning, dominance of the Liberals and Conservatives
  • Canadian Labour Party did not see success, the TLC was accused of being too Conservative by the provinces and in return the TLC thought the provinces were too radical
  • Communist Party founded by radical members of the socialist party, strong tensions between the Communists and CLP, part ways at the end of the 1920s
  • Progressives went on the record to say that they opposed militias to break strikes, but did not support an open alliance with Labour, not in farmer’s interest
  • Woodsworth and Irvine the first labour MPs to not ultimately be absorbed by the Liberals
  • when the Progressives splits part, 6 of its more radical MPs formed the “Ginger Group” which increasingly cooperated with Woodsworth and Irvine
  • coalition between the Labour movement and the UFO did not go well, not much progress in the Ontario legislature 
  • a vital, active Canadian left, but ultimately politically impotent because of their divisions, e.g. a dozen labour and socialist parties in Toronto alone
  • barely survive the 1920s, a blip on the map
  • what was needed was encouragement for unity…which came with the Great Depression
  • seems that the capitalist system is indeed collapsing, no country immune
  • Canada’s radical groups and labour groups worked together to unite the non-Communist left, as already happening in Parliament with Woodsworth, Irvine, and the “Ginger Group”, who became “The Commonwealth Party” in 1922

The Rise of the CCF

  • Conference of Western Labour Parties held in 1929, when they meet again two years later in the Depression, motivated, agreed to form a national labour party, extended an invitation to various farmer’s organizations to join, recognized that labour and farmers were ultimately facing a similar plight, marginalized by the Liberal capitalist system, their joint action was demanded
  • important participants: Gardiner (UOA), Coldwell, Williams, and Tommy Douglas, also the League for Social Reconstruction, an intellectual brain trust of the CCF, a group of left-wing intellectuals, writers. etc. with a Christian background
  • Aug 1932 conference in Calgary brings together the labour movement and the farmer movement, synergy, they agree to federate and form a new movement that will champion the cause of socialism
  • The Co-operate Commonwealth Federation to be a social movement for change, radically change the way Canadian society functioned, challenge the Liberal establishment
  • draft a statement of purpose in 1933 at their first official meeting, The Regina Manifesto, advocates the eradication of capitalism, the peoples to control the state, the state to regulate the economy and provide a wide range of social services, public ownership of all financial establishments and public utilities, aimed to ensure that democracy governed the party rather than the party officers who were to be elected annually, policy conventions
  • hourly pay falling an average of 2/3rds, collapse of international commodity prices, drought in Saskatchewan
  • within 3 years of its founding, CCF the number 2 party in BC, Alberta, and Saskatchewan, with seats in Manitoba and Ontario as well
  • no support in Quebec or Maritimes
  • at the federal level, in 1935 they ran 119 candidates however does not have the same electoral breakthrough as the Progressives or as the provinces, only 9% of the popular vote, elects only 7 MPs in the West
  • yet the CCF the true opposition to King’s Liberals, they are advocating the most radical changes, the Conservatives had just significantly lost the last election and are in disarray
  • success: section 98 of the Criminal Code which allowed the government to arrest and deport immigrants that they deemed a threat to national security scratched (reaction to Winnipeg General Strike)

Evaluating the CCF

  • socialists, as demonstrated in Shawn Mills’ article
  • but in Alberta and Saskatchewan, Sinclair argues that the CCF party was in the populist Prairie tradition (like the Progressives) and consistent with the dominant presence of the middle class
  • CCF not interfering with the primary means of production, the family farm in Saskatchewan, not attacking capitalism per se but those aspects of capitalism that were affecting the farm
  • Dan Horowitz argues that the apparent popularity of socialism in Canada can be contributed to the “Tory touch”, Canada more receptive to the organic view of society, collective aspects
  • but if Canada is so receptive to a collectivist, socialist approach, why didn’t the CCF make more progress at the federal level?

Challenging the Establishment, part 3: Social Credit and the Union Nationale

Main Arguments:

  1. The rise of Alberta’s Social Credit Party and Quebec’s Union Nationale may both be understood as Depression-era reactions against industrial capitalism and the respective political status quo in each province;
  2. While both parties came to power criticizing industrial capitalism and even demonstrated some left-leaning attributes, fundamentally, their concern was not so much to challenge the established liberal order, but to correct it, ensure it endured, and that more radical solutions were not attempted;
  3. Both parties were successful because they responded to Albertans and Quebecers’ search for scapegoats and solutions. However, neither party delivered on the reforms they had promised, and both were quickly revealed to be fundamentally conservative in their governing style.

Background to the Rise of Social Credit

  • as the Depression continued, people searched for alternatives
  • e.g. rise of the right-wing Nazis and Roosevelt’s New Deal
  • Canada not immune
  • Social Credit: 1930s Alberta is overwhelmingly rural, most non-farm employment was still linked in some way to the agricultural economy, Big East business the scapegoat
  • UFA had evolved into a party like any other, increasingly Conservative in its reaction to the Depression, despite being elected on a wave of agrarian discontent a generation earlier
  • socialist nature of CCF appealing, but ultimately Social Credit
  • Social Credit theory developed by C.H. Douglas, rejected social collectivism, promised to cure capitalism through reform, answered why the system could be producing so many goods and yet there was poverty, the “A + B” theorem, the real cause of the Depression was that the real wages being paid to produce goods and services was always less than the total costs of production, i.e. it costs more to produce goods than people were earning to produce them, never enough money in the economy to purchase the goods that the economy was producing, solution Douglas proposed was to make up the difference, the government should provide every consumer with a “social credit”, i.e. an amount of money from the government that could theoretically cover the balance between the goods produced and the paid wages, a very rudimentary form of Keynesian economics, in periods of economic downturn governments should spend money, keep enough money in the economy for it to function
  • Alberta was fertile ground for this theory: UFA personalities had preached Douglas’ theory as part of their larger attack on the economic status quo

Background to the Rise of the Union Nationale

  • Montreal 1933: 1/3rd of the population on relief
  • 1920: agriculture only 1/3rd of the Quebec economy, declining
  • increasing industrialization, development of the natural resource sector
  • increasing foreign capital
  • culture: the social tensions were as cultural as they were economic, increasing industrialization and urbanization meant the marginalization of Francos, scapegoated the Anglos
  • French-Canadien nationalists concentrated on intellectuals, e.g. Lionel Groulx, who said the Depression was the result of foreign capital’s dominance, calls for reform, came from the new social thought in the Catholic Church: a Christian humanism 
  • Programme de Restauration Sociale (PRS): Catholic trade unions, farmer’s organizations, credit unions, patriotic and professional societies, universities, called for fundamental reform, including rural reconstruction (strengthen and extend the agrarian sector especially in northern Quebec); the labour question (protect workers, provide greater economic security for the working class); trust and finance (curb the power of private utilities and other large enterprises like the milk industry); political reforms (elimination of patronage politics, return to ethical politics hahaha) 

The Rise of Social Credit

  • delegates urged the UFA government to examine the Social Credit theory as a method to recover, government drags its heals
  • William Aberhart emerges as the leader of the SC political challenge, called for representatives, had a populist, non-partisan nature
  • each Albertan to receive a monthly government cheque to spend (like Klein!)
  • “All you have to know about Social Credit is that if you vote for it the experts will make it work”
  • effort to correct the weaknesses of liberal capitalism, bring stability
  • rapid rise
  • beyond the attraction of the $25, Albertans attracted to abolishing poverty, and it tapped into Western discontent with the East, the soft-totalitarian nature was attractive, call for charismatic leaders like Aberhart, a great communicator 
  • Aberhart drew a large share of religious community (Christian fundamentalism compatible with Social Credit), harped on his credentials like his Queen’s degree, but maintained a folksy, populist appeal, appeared in warn and patch-up coats, used improper grammar
  • SC’s success attributed to its advanced organizational structure, paralleled the UFA, SC brought together study groups, the “Social Credit League”, makings of a mass political movement, Aberhart and his followers able to convert some UFA organizations to SC, movement becomes a full-fledged party in April 1935
  • hint that what was billed as a reform movement had some reactionary elements, e.g. Aberhart and his lieutenants controlled the party (drew up the platform, vetted the candidates who were selected, preferred small businessmen, only 9 farmers selected to be SC candidates); opposed by the major corporate interests and some businesses (warned of economic disruption, inflationary pressures that would be inherent, government intervention in setting wages)
  • Aug 1935 provincial election, 56/63 seats went to the SoCreds
  • 15/17 elected federally
  • the popular vote disguised divisions within society
  • opted for the quick-fix, the heir to the populist reform tradition (i.e. tax the rich), Aberhart made clear that his reform was preaching reform not revolution, the CCF had not done itself any favours by aligning itself with unpopular UFA elements, getting the votes of angry people

The Rise of the Union Nationale

  • divisions among the Quebec Liberals, young nationalist intellectuals who pressured for social services and curb foreign control
  • Action Liberale Nationale formed (ALN) led by Paul Gouin, the grandson of the Parti Nationale founder, supported the nationalization of Quebec’s private power companies, break the dominance of foreign capital and address the marginalization of French Canadiens
  • to be addressed by a third way
  • new, no electoral experience, no party workers to run campaign
  • open to alliance offers…joined the Quebec Conservative Party, who had been in opposition since 1897, dissociated from the federal party, they too criticized the close ties between the Liberals and Big Business, foreign capital, etc.
  • Maurice Duplessis becomes leader of the Conservatives, as Taschereau’s Liberals faltering, merges with the ALN and other independent nationalists, a significant powerful nationalist party
  • Union Nationale meant Quebec voters presented with platform for significant political, economic, social reform
  • Taschereau’s Liberals recognized the threat too late, got a bare majority in next election, first substantial opposition in years
  • Public Accounts Committee revived under Duplessis, investigate, reveal patronage, government waste, e.g. more than 40 of Taschereau’s relatives employed by the government, and is forced to resign, Godbout takes his place, promises reform (like Martin coming to power)
  • new election in 1936, UN wins 76/90 seats
  • results a protest against an economic system and against political corruption, accompanied by a demand for the reform of Liberal capitalism to allow French Canadiens to regain control over Quebec’s resources

Reactionaries in Reform Clothing: Evaluating the SoCreds and UN

  • Aberhart realizes that Social Credit is impossible to implement
  • Social Credit Act passed, with a number of other measures, to implement the program, affects banking which is under the federal jurisdiction so it is ruled unconstitutional, Ottawa vetos other pieces of SoCred legislation
  • what is the social credit party if there is no social credit?
  • Conservative: from a protest movement preaching radical reform to a conservative, reactionary group that left behind its populist roots
  • Manning claims that SoCred provided Alberta with the most Conservative government
  • similar dynamic in Quebec
  • Duplessis a nationalist but not radical
  • his concern was not social and economic reform
  • but he promises to fight political corruption
  • does not promise specifics
  • in power, UN largely ignored its stated goal of reforming capitalism, becomes a right-wing anti-labour nationalist party, spends money to promote agriculture in northern Quebec, but neglects urban workers and poor in Montreal
  • a good friend of liberal capitalism
  • ALN disillusioned with the conservatism, withdraw their support, many turn to the Liberal fold
  • Duplessis has a free hand to run Quebec, few restrictions on foreign capitalists, attacks on left-wing activism (those preaching reform), few social services
  • once again, a party preaching reform that rose quickly to power on a wave of Depression-era discontent turned out to be a reactionary party that maintains the status quo of the liberal capitalist order

Canadian Politics during the Second World War: From Crisis to Reconstruction

  1. Canada’s party politics leading to and during the Second World War were influenced significantly by the memory of the political crisis that erupted over conscription during the First World War;
  2. Wartime issues, notably conscription, shaped party politics in Quebec, leading to the election of the Liberals in 1939, the advent of the Bloc Populaire in 1942, and ultimately, the return of the Union Nationale;
  3. While the CCF and the Canadian Left appeared poised to make a breakthrough during the war, Canada’s established political parties – notably the Liberals – were able to deflect the challenge by moving to the left, maintaining the dominance of liberalism (and Liberalism) in Canadian party politics.

The Road to War

  • King’s Liberals followed a policy of appeasement, especially Quebec political opinion, mindful of what the last war had done to Canada and the Liberal Party (split), avoid a war, or limit the scope of Canadian participation
  • King relied on his lieutenant (French Canadian) for opinion
  • “Twin mantra”: parliament will decide and no prior commitments
  • Parliament will decide: the government will actually tell parliament what to decide, a stall tactic
  • No prior commitments: isolation sentiment
  • Canada would have to increase its defence spending, this revealed the depth of isolationist sentiment in Quebec, Quebec Liberals broke rank and voted against the party, Western Liberals argued the money should go to social spending
  • Canadian opinion in flux
  • King made a very pro-British speech, seemed to be going towards the imperialist-nationalist view of Canada
  • if the Liberals fall, a Union government likely
  • two months later, following the German occupation of Czechoslovakia
  • two speeches: King frustrated that Canada called upon to fight in Europe every 20 years, Lapoint speaks against conscription
  • “No neutrality, no conscription” pact
  • Canadian parliament declares war after Britain, only four MPs opposed, one of which was the CCF leader Woodsworth, at odds with the majority of his party, Nazi aggression had to be addressed, CCF previously pacifist, Woodsworth stands alone, a bit of a split, he resigns as leader and Coldwell takes over
  • the scope of its participation had to be decided, King wanted to avoid an all-out war effort (Borden’s all or nothing approach), preferred a limited liability approach

Conscription Crisis, part 1

  • French Canadians had accepted entry into the war on the grounds that conscription would not be enacted, but young French Canadians actually flocked to the recruiting offices, motivation of employment after the Depression
  • Duplessis tries to revive nationalist fears, federal ministers intervene in the Quebec provincial election, promises that so long as the Liberals are in power in Ottawa there will be no conscription, Union Nationale are defeated, Liberals come back to power
  • King’s luck continues into the new year
  • Jan 1940 the Ontario legislation passes legislation that criticizes Ottawa’s limited liability 
  • Manion (Conservative leader after Bennett), certain level of non-partisanship, Parliament not sitting as this time, assured by King that there would be no election until after parliament had met in Jan 1940, keeps his word, but calls a snap election after one day
  • Manion was anti-conscription 
  • Liberals win election, Manion loses his own seat and resigns, by Jun most of Europe has fallen, it appears Britain is on the verge of being invaded, limited liability collapses
  • a second Canadian division sent oversees 
  • calls for conscriptions begin
  • National Resources Mobilization Act: introduces conscription but just for domestic service
  • some Liberal members express misgivings about this trend, but King assures them there will not be oversees conscription, still generally accepted in Quebec, but the role of ministers like Lapointe was crucial
  • pressure grows, Minister of Defence pushes for it
  • Meighen returns to leadership of the Conservatives, calls for conscription and a Union government, like WWI
  • Lapointe dies, King loses this support/opinion 
  • spread of the war to the Pacific, West Coast concerns, increasing pressures all over
  • 1942 culmination: King announces a plebiscite, asking Canadians to release the government from its pledge, Quebec is generally opposed, evidenced by the emergence of the pressure group Ligue pour la defense du Canada, country splits along linguistic lines, profound division, King declares “Conscription if necessary but not necessarily conscription”, NRMA revised to permit overseas conscription but not require it, debate causes serious splits in cabinet and caucus, bill passes, government supplies, Liberals stay united and in power
  • conscription issue continued to have reverberations in Quebec politics

Rise of the Bloc Populaire Canadien

  • to defend French Canada’s interests, seen as losing its autonomy, especially given close relationship between federal and provincial Liberals
  • advocates Canadian neutrality, independence from Britain
  • led by Maxime Raymond at the federal level and Laurendeau at the provincial level
  • emerges in the wake of the plebiscite
  • 5 MPs in parliament, but disappears from the federal scene by the end of the 1940s
  • power struggle between its younger and older members
  • takes votes away from the Liberals at the provincial level and UN return to power
  • significance in history lies in fact that it was indicative of the socio-cultural transformation and the evolution of French Canadian nationalism
  • 1944 defeat and the return of Duplessis occurred just before the conscription issue re-erupted as a crisis

Conscription Crisis, part 2

  • King stated in Fall 1944 that overseas conscription would not be enacted
  • but Canadian forces facing a reinforcement conscription, not enough volunteers, men being killed
  • Liberals divided along linguistic lines
  • King suspects there is a plot against him to get his job, he fires his Minister of Defence to reduce the pressure, brings in McNaughton, but he quickly begins suggesting overseas conscription as well, mentions that if it is not enacted King will be faced with wholesale resignations from the military, a revolt, as threatened the English Canadian MPs
  • looks like parliament heading towards rupture, division of First War, but does not play out, King able to retain the support of his Quebec MPs due in large measure to the threat of a Union government, King gives a powerful speech in parliament addressed to his own party
  • Conservatives use this opportunity to demand more conscripts, strategy is that if the Liberals bow to the pressure they will alienate Quebeckers and if they don’t they will alienate the Anglos
  • unfortunately for the Conservatives the war ends just before the 1945 election and the Conservatives call for conscripts to fight in the planned invasion of Japan, serious mistake, English Canadians not emotionally connected to this war
  • Liberals share of the popular vote declines 5-10% but still hold on to their majority
  • Conservatives get less than 30% of popular vote, 66 seats

The Centre Can Hold: The Left Challenge and Establishment Response

  • Liberal economic strategy after the war influenced by classical liberalism
  • 1930s priority was a balanced budget and resisting federal responsibility for social welfare (that’s provincial jurisdiction)
  • King refers the Bennett New Deal to the Supreme Court, wants the court to rule the legislation unconstitutional, the JCPC has the final word, obliges him, it infringes on provincial power
  • King appoints a commission to examine two things: the economic basis of Confederation (financial relationship between the levels) and the power relationship (distribution of powers between the levels)
  • Relief Act, 1936, cuts the level of grants in aid to the provinces in order to balance the federal government, the relief camps are closed, King Liberals concerned that they were breeding discontent and dependency and radicalism
  • Liberals create a National Employment Commission to examine the unemployment problem, to King’s horror it recommends a Keynesian response, some deliberate deficit spending in 1938, but really King not breaking with classical liberalism, a result of cabinet pressure, throws a bone, some public works, would take the war to change this
  • money spent during the war that wasn’t spent during the Depression, a wartime economic boom, seems to support government intervention can ensure prosperity and social security, seems to support Keynesian economics, pressure on King
  • Ottawa should have constitutional and taxation powers to create a welfare state, King resisted, but did adopt unemployment insurance to prevent agitation 
  • it was the challenge from the left that moved the Liberals away from liberal economics
  • socialism received its greatest support when prosperity returned, those enjoying prosperity more generous, wanted it to continue
  • radical movements come when expectations rising
  • CCF becomes a major political force in the 1940s, e.g. Arthur Meon loses his seat to the CCF candidate, to the West of Ontario for the first time
  • CCF forms a minority government in Ontario, polls find it the most popular party in the country, under Tommy Douglas elected in Saskatchewan as the first avowedly socialist party in North America 
  • provokes the transformation of Canadian parties
  • Meon resigns, wants a leader that can sweep the West
  • discussions in Port Hope in Sept 1942, The Port Hopefulls, Conservative party talks about adopting social welfare legislation like medical insurance, adopt the Port Hope agenda
  • name changed to Progressive Conservatives under new leader
  • as for the Liberals, the CCF challenge, shift to the left, espouse reform liberalism: continuation of free market but responds to demands for full employment and social welfare, endorse the report on social security for Canada, want to prevent socialism, different from the CCF agenda, e.g. no endorsement of public ownership or a maximum income, a baby bonus introduced, popular in Quebec where birth rate high and support low, King ensured that the first baby bonus cheques would not arrive until after the next election in 1945, incentive

The Nationalist Impulse in Canadian Party Politics in the 1960s

Main Arguments:

  1. The rise and fall of the Progressive Conservatives led by Diefenbaker may be interpreted as the manifestation of a growing nationalist reaction in Canadian political life of post-1945 international trends and their implications for Canada, notably in terms of relations with the US;
  2. Returned to power in 1963, Liberal Party fortunes were also linked closely to this nationalist reaction playing out in Canadian political life;
  3. The impact of nationalism on Canadian party politics was not limited ot the federal level; in addition to responding to these same post-war international conditions, there was a growing reaction in Quebec to Canada’s internal political dynamic. This response would have a major effect on party politics on both the Quebec and federal political stage.

The Growing Nationalist Concerns about Canada-US Relations

  • the forces of globalization (economic interdependence, cultural exchanges) undermining state sovereignty and its ability to respond effectively to transnational issues
  • Canadian policy shaped by this evolution
  • one of the chief reasons for the post-war economic boom was the strengthening of ties between corporate Canada and corporate America
  • Ottawa was in debt because of the war years, reliant on American capital
  • Americans could ensure economic boom continued
  • the international economic order that fell apart in the war began to be reconstituted under the preponderance of American economic power (multi-lateral trade, communication and transportation advances, economic interdependence)
  • in the two decades after the war the value of foreign trade grew exponentially, rose largely from the spread of MNCs
  • Huntington: “ushered in the American Empire”
  • the older post-Confederation east-west economy (Canada and Europe) was increasingly oriented within North America
  • the PCs embraced this growing economic integration, the CFF even supportive, a means to fund the welfare state
  • growing concerns in the 1950s about the implications for Canadian sovereignty, culture
  • the opposition parties take a closer look at Ottawa’s foreign investment policies, Liberals are compromising the Canadian national interest, trading its long-term economic development for short-term political advantage
  • Liberals hold a public inquiry on the issue, the Gordon Commission released its report in 1957, foreign investment in and of itself not a good thing, opposition parties put Liberals on the defensive, Gordon Report was a watershed in Canadian life, it legitimated concerns about American influence in the country
  • new project: construction of a national pipe line, growing American influence in the project, the PCs and CCF criticize the Liberals for selling out to the Americas, this debate combines with the Suez Crisis
  • Liberals accused of siding with the Americans against Canada’s two mother countries, Britain and France intervene, and Canada seems to side with America by engaging in UN peace talks instead (oh fuck off)  

The Rise and Fall of the Diefenbaker Reaction

  • connection between the fact that Diefenbaker was capitalizing on this sense of marginalization and the larger political sense generally shared by Canadians that Canada as a whole was becoming marginalized, a periphery of the American Empire
  • Tories call for a reduction in Canadian dependence and a revitalization with the UK and the Commonwealth
  • Diefenbaker: “Create a new sense of national purpose and national destiny” (challenges the Liberal continentalism)
  • Canadian electorate agrees, they want a country developed by themselves according to their own destiny, a nationalist reaction to transnationalism
  • in office, the PCs have a difficult time realizing this vision, stemming the tide of transnationalism and globalization
  • D’s nationalism was trumped by his anti-Communism (means that Canada-US defence relations are going to continue) and his commitment to private enterprise (liberal capitalism) 
  • in the military sector, the adoption of NORAD and the development of the Development Production and Sharing Program (enables companies within Canada to bid on equal terms with American firms within the military industrial complex)
  • in the economic sphere, D promises to divert 15% of its American imports to British imports, diversify, but this never happens, Canada committed to multi-lateral trade, government intervention frowned upon, D does not rise to the debate that Britain and Canada should establish a free trade agreement
  • tension between D nationalist reaction and North American integration demonstrated most dramatically when Ottawa requested to accept American nuclear warheads on Canadian soil, seems to have agreed, but Kennedy and D had a poor relationship, growing pressure to clarify, and ultimately the issue is resolved in 1963 when there is a cabinet revolt (Minister of Defence resigns) and the government falls
  • the election is about the growing nationalist reaction, Canada’s place in the world
  • Pearson under fire for flip-flopping on the issue of the nuclear warheads
  • D tries to portray himself as the defender of Canadian independence
  • the first election in Canadian political history in which a dramatic appeal to nationalism (anti-Americanism) did not carry the day 
  • Liberals come to power
  • Grant sees this as the death of Canadian nationalism, an independent Canada (see course reading)

The Nationalist Element in Canadian Party Politics, post-1963

  • the continentalist version seemed to have carried the day, but nationalist sentiment continued, e.g. new Canadian flag
  • the dispute over which vision of Canada was going to prevail: Anglo-British (D) or North American
  • divisions between the Liberals and Conservatives over the flag
  • Liberals lured Walter Gordon (of the report) into their fold, had him run, Pearson endorsed the economic-nationalism that he supported, Gordon appointed Finance Minister, Liberals appear to be embracing economic-nationalism, but their embrace was not off to a good start when Gordon delivered a budget that reflected the strength of Canadian nationalism, e.g. designed to discourage foreign investment by implementing a “takeover tax” for example which added a charge for foreign firms purchasing Canadian firms and the taxes on dividends, reward for Canadian-owned companies
  • this economic nationalism provokes a negative response from the business community on both sides of the border
  • not implemented
  • Gordon calls for Canada to oppose the escalation of fighting in Vietnam, was not authorized to do so, outrage from Pearson and Paul Martin
  • Merchant-Heeney Report calls for Canada to work out its differences with America through private diplomacy
  • Pearson distances himself from this report, acknowledging the strength of Canadian nationalism
  • nationalist wing led by Gordon; continentalism led by Sharp (Foreign Affairs)
  • Watkins Task Force, report released in 1968, economic nationalist, shapes the discourse in the 1970s and beyond (implications for the Trudeau era to be discussed), as such Gordon created a new generation of leaders and the nationalist cause, a bridge between imperialist nationalism and the more recent economic nationalism, with an Anti-American threat running through

The Nationalist Response in Quebec Politics (pre-1960)

  • the elaboration of the Canadian national state provoked a response from Quebec (nationalist) reflected in the evolution of party politics within the province
  • rising from the wartime experience, moving towards a more technocratic state
  • at the federal level the Liberals favouring a welfare state from coast to coast to maintain peacetime prosperity, a new federalism, grants to universities, social programs
  • drew attention to the nature of the BNA and the division of Canada (power relationship, power balance)
  • an early reaction on the Quebec stage was the Bloc Populaire Canadienne, the Bloc was an attempt to elaborate an alternative to a federally-dominated welfare state, saw this as the thin edge of the wedge, first stage of Canada ultimately moving towards a unitary stage, implying the loss of Quebec’s autonomy
  • Bloc argued Canada was a political construct, needed a clear division of powers guaranteed
  • on one hand a more secular, urban, liberal Quebec nationalism and on the other a more Catholic, rural, Conservative Quebec nationalism
  • they argued that a strong Quebec state was needed to overcome this challenge to French survival, a powerful centralizing Anglophone welfare state administered by Ottawa (boo hoo) that would not take into account the needs and values of French society and therefore undermine it
  • Quebec should not be forced to choose between these, should be able to have both, in the form of a Quebec welfare state
  • the Bloc Populaire can be seen as a transitional party between the Union National and the more modern, secular nationalism of the Bloc Quebecois
  • because of these conflicting currents within it, the Bloc fails
  • main nationalist response articulated by Maurice Duplessis (Union National)

Note on Bryden Article:
Liberal Party Dynamics and the Achievement of Medicare, 1965

  • These great accomplishments occurred in spite of, not because of, Pearson
  • As an opposition party, the Liberals were more left-leaning (e.g. progressive social policies) than they were when elected (with Pearson at the helm in 63 and 65)
  • There were positive federal-provincial health-insurance discussions going on in 1965 that alarmed the Conservatives, with July 1 1967 the “realistic target date” for starting a national health-insurance scheme (oh, and the Centennial) 
  • Alberta represented a problem, Premier Ernest Manning objected to an arbitrarily universal scheme that limits freedom of choice
  • But social policies (or policy issues of any kind) did not play a major role in the 1965 election, in fact of more significance were scandals that had plagued the Liberals since gaining office, and the outcome was just two more Liberals, two seats shy of a majority government
  • The party moved to the right, Gordon resigned, and the Toronto Star commented: “The man Pearson chooses to fill the key post of Minister of Finance will largely determine whether the country’s economic resources will continue to be directed towards social reform and economic independence.” Sharp’s appointment caused some serious doubts over the future of medicare.
  • Hesitation clouded 1966, with fretting about the cost and priority of medicare and a one-year delay was announced, this was okay with the provinces, they were reluctant to commit themselves, costs, and the blame on federal shoulders was to their advantage
  • Sharp met with the provincial finance ministers, Quebec proposed the implementation of a national health insurance “gradually”, Sharp started to warm to this idea, Ottawa looked unwilling to discuss if it stuck to its own criteria
  • E.g.: Robarts stated that Ontario would not participate in the national medicare plan because “under present economic conditions Canada cannot afford the ‘universal’ scheme” and because his government was philosophically opposed to the idea of a compulsory plan.
  • Cabinet decided to go ahead with medicare for July 1, 1968, why it did not delay is unknown, as the PM appeared to have believed that all the provinces should be brought in at once even at the expense of some of the previously stated national criteria (so who was on board!!??)

“Lament for a Nation”

  • Canada sold out to economics and sacrificed its identity
  • fighting against globalization, not fighting for Canada
  • so when was the glory period?
  • Grant looks at French Canada as the only true culture, an example of nationalism, in contrast to Canada, the traditional nationalist tendencies
  • use of paternalistic language, the Liberals have taught the masses to accept the inevitability of this wave
  • we value of standard of living more than our autonomy
  • narrow definition of nationalism as economic

“Pearson and Health Care”

  • the Kingston Conference: start of a new direction, party renewal, after defeat
  • move to the left, reaction against the newly forming NDP, shift towards intervention
  • reaction from the top was negative, hesitant
  • the grassroots intelligentsia gaining strength and influence
  • the ensuing Liberal Rally reinforced the Kingston Conference, showed that the party had in fact lost touch with party members, the new leftist direction was affirmed

Politics in an Age of (Quiet) Revolution

Main Arguments:

  1. The Quiet Revolution – and its implications for party politics on both the Quebec and federal political stages, may be understood as part of the nationalist reaction to post-war international trends that we began exploring last class;
  2. The endurance of the “national question” and the ascendancy of neo-nationalism in Quebec political life led to a fundamental realignment of the party system in Quebec that included the decline of the Union Nationale, the Quebec Liberals taking a more nationalist stance, and the rise of the Parti Quebecois.
  3. The realignment on the Quebec political stage had implications for the federal political parties. The PCs under Diefenbaker were slow to respond to the implications of the QR; the Pearson Liberals were more conciliatory, but limited in their margins of manoeuvre owing to their minority situation. Ultimately, the QR and growing questions over Canada’s future provoked changes in the leadership of both of the main parties.

Background to the QR

  • stability and stagnancy at the federal level paralleled by stability and stagnancy at the provincial level in Quebec, Union Nationale in power from 44-60, autonomy still a pursuit
  • traditional nationalists argued that French Canada’s autonomy could be ensured if there was a return to pre-war federalism and provincial jurisdiction was respected
  • as Duplessis battled the “new federalism” of the 1950s trying to win back the provincial powers that Ottawa had tried to take over (e.g. taxation) there was concern rising among neo-nationalists who felt that Duplessis and the UN only had half the equation: yes, Quebec autonomy had to be protected, but at the same time the UN government was not doing enough to build up Quebec City so that Quebeckers could run the welfare state
  • neo-nationalists further concerned about foreign economic presence in Quebec
  • we need a dynamic, interventionist Quebec state, ensure that Francophones will be present in the private sector, the social and cultural institutions to ensure national survival
  • a homogenizing effect as Quebec increasingly integrated into the global economy… assimilation?
  • in response, the Tremblant Commission appointed, to examine the nature of Quebec’s relations with the rest of Canada, Commission’s report influenced heavily by the neo-nationalist position
  • political dominance of the UN at this time meant that the recommendations of the Commission, the appeals of neo-nationalists, increasingly fell on deaf ears, no action
  • UN able to perfect its formula for political success: it had no official membership, no internal mechanism for consultation or decision-making, consisted of elected members, defeated candidates, and their local organizations (which distributed patronage), so fairly decentralized on one hand, but power was highly concentrated
  • UN the classic case of a traditional party that became warn out from spending too many years in power, appropriate organization for the first half of the 20th century, but no longer, left vulnerable by neo-nationalist attacks
  • Paul Sauvé replaced Duplessis when he died, credited with getting the beginnings of the QR underway, but he died too
  • UN divided, weakened, under the leadership of Antonio Barrette, weakened within
  • opened an opportunity for the Quebec Liberals, the perennial opposition party, had a hard time staking out a Quebec-centric position, led by Godbout and Lapalme, portrayed as federal vassals, under their control
  • 1955: Quebec Liberal Federation established, the first specifically Quebec-structure that the Liberals had, suggests growing strength of nationalism in politics, the furthest that any Quebec Party had ever gone in terms of internal democracy, this re-organization helped the Liberals build support beyond their traditional ways, able to win an increasing proportion of the working class vote, also able to establish a stronger presence in the rural regions
  • Laplame eventually forced to resign, becomes House Leader, also given the task of developing a new platform, happens to be inspired by the Tremblay report
  • Lésage becomes the new leader, a former federal cabinet minister under St-Laurent, goes about building his “team of thunder”, including Rene Lévesque, determined to make the Liberals the rallying point for the anti-UN, the anti-Duplessis
  • now espousing the neo-nationalist ideal, campaigned on the slogan “It’s time for a change”, they win in 1960, but very narrow majority, efforts of the Quebec Liberals to increase their share of the rural seats to be credited
  • Quebec government grows exponentially, 6 new ministers, 8 public enterprises, including Hydro-Quebec, 
  • election called, hope to consolidate their position over the UN, “Masters of our own house” slogan, increase their seat count to 63, QR seems to be progressing quite nicely
  • before 1957, there was no distinct Quebec Liberal Party that was a member of the national Liberal federation, no distinct entity, instead the Quebec lieutenants overlooked affairs in Quebec, as the Lésage Liberals adopt a more federalist position problems were created, Quebec Liberals torn between the federal and provincial level
  • formal split between the two parties suggested, Lésage wanted to be dissociated from his federal cousins, the feds were concerned about the amount of power Lésage had, ability to dominate both Quebec and Federal Liberal parties
  • tensions paralleled amongst the Liberal members themselves, e.g. Lévesque, Aquin, and Gérin-Lajoie, who take a more assertive nationalist stance
  • results of the QR do not seem to be panning out as quickly as voters would like
  • growing reaction to the QR and to the Liberals was the UN, trying to work out of opposition, they had been significantly discredited by the results of the Salvas Commission (Duplessis and corruption scandal)

The Return and Decline of the UN

  • Daniel Johnson elected as new UN leader, seen as a triumph of the old party, but some attempts to modernize its structure and policy, e.g. holds first-ever policy convention in 1965, clear that it is shifting towards a more neo-nationalist tradition, rise in the party of younger members to leadership positions
  • the problems that arise from a first-past-the-post position, loss of Liberal support in 1966 election, partially to new independent nationalist parties, the UN wins a majority government but they do this with less votes than the Liberals had received in the election, the UN able to form the government with less than the share of the popular vote than they had received in 60 or 62, bizarre
  • UN promised a new relationship between Quebec and the rest of Canada, debate takes on a new intensity following the UN’s election, had divisions between its more federalist wing and its more nationalist wing, like the Liberals, ambiguity in Johnson’s “Equality or Independence”
  • after Johnson’s death, power struggle between nationalist and federalist wings, new leader is weak, not much confidence from party, party also weakened by student protests, growing labour strikes, increasing violence from the FLQ, controversy over linguistic rights in the late 1960s
  • the decline of the UN paralleled by the rise of the Parti Quebecois

The Rise of the PQ

  • RIN founded as a movement in 1960, transformed into a political party in 1963, drew conditions between the Quebecois and the decolonization of the third world countries
  • Ralliement National, group of dissident Social Credits
  • Quebec Liberal Party, group of more reform-minded Liberals discussing new direction, “Where do we go from here?”, during this meeting Levesque begins to talk about what will become known as sovereignty-association, nationalist pride, also holds that it would be more effective to end the federal-provincial fighting
  • Oct 1967: Levesque’s resolution defeated, walks out of party’s policy convention with a few supporters, a month later form the Movement Soverginete Association, a more independence-minded association, early fight over the language question (Levesque was moderate, conciliatory, anglo rights had to be protected and guaranteed, reflected pragmatism, a mainstream alternative)
  • some talks of a formal merger between the RIN and MSA but not fruitful, a coalition, individual members join the new Parti Quebecois
  • ambiguity of sovereignty-association vs. new party’s diverse, intellectual membership led by the charismatic Levesque, able to front an early challenge to the two major parties
  • four major parties contesting election for first time: Liberals shied away from any aura of separatism, Bourassa proposes profitable federalism (economic development and jobs), UN had not really redefined itself but pushing for special constitutional status, the Ralliement Creditiste a right-wing social credit party
  • electorate divided, number of contenders, first-past-the-post produces interesting result, Liberals win a comfortable majority, the Creditiste have regionally concentrated supported and win 12 seats with 11% of the vote, the UN formed the official opposition but support declining, relative success of the PQ, Levesque is defeated in this election, PQ only win 7 seats, but 23% of the popular vote, more than the UN or the Ralliement Creditiste
  • a polarization of Quebec politics over the issue of sovereignty
  • outcome interpreted as a triumph of federalism in English Canada, but they were a source of bitter resentment, the October Crisis occurs only a few months later, even though there is a strong, popular party advocating separatism the system is stacked against it, sense that democracy is not working, it is preventing the Quebecois from practicing their right to self-determination

Federal Repercussions:

  1. The Diefenbaker-Pearson Era
  • “Win Without Quebec” strategy adopted by the PCs
  • PCs rely on the UN to organize on the ground
  • Diefenbaker willing to offer only symbolic gestures, e.g. adopting federal bilingual checks
  • PCs could not consolidate, their support in Quebec in 1962 collapses
  • reflecting the alienation of Quebec voters from both parties, Caouette and the Ralliement Creditiste comes out of nowhere to win 1/3 of the federal seats, a reflection of the nationalist response to globalization, a right-wing protest, Cauoette an evangelical nationalist, appealed to the little guy in the rural region
  • Tories only able to retain office in 1962 because the Credistic success was so large that it reduced potential for Liberal gains
  • three consecutive minority governments at the federal level
  • Pearson not regarded as strong enough
  1. New Realities, New Leaders

Politics in an Age of ‘Liberation’

Main Arguments:

  1. It was only in the 1960s and the advent of second wave feminism that women began to win a more prominent place in political parties and in Canadian political life;
  2. A theme running through the various manifestations of the feminist movement in Canada has been ambivalence toward party politics. This has arisen from the dilemma over whether it makes more strategic sense in pursuing the feminist agenda to engage in partisan politics or to maintain a distance from the established political order.
  3. In general terms, the pattern that prevailed from the feminist mobilization of the 1970s onwards was one of accommodation. The three parties vary somewhat in their commitment to the numeric and substantive representation of women, but all three actively tried to accommodate (up to a point) the feminist movement.
  • Women and Political Parties, 1917-1960s
  • The Rise of Second Wave Feminism
  • The Feminist Challenge and the Parties Respond

“The Liberal Order Framework” – the notion that the established socio-economic order will adapt in order to retain its grip on power.

Canadian Feminism

  • has always had an ambivalent relationship with political parties
  • called for an opening, for a response
  • on the other hand, feminists have mistrusted parties, elitist organizations, at their most extreme are antithetical to women’s interests and responding to the feminist agenda
  • early Canadian suffragism was part of a broader progressive challenge to the traditional party system, politics as usual, and this immediately gave rise to a fundamental dilemma
  • early feminist groups attracted to a position separate from the parties, guarantee autonomy, not be co-opted, maintain idealism and ideological purity
  • on the other hand, also drawn to more active participation in party politics, by engaging in the established order, perhaps the feminist agenda could be achieved more effectively
  • tension between independence and partisanship, principle and pragmatism, within or outside the system
  • this dilemma has shaped the relationship between women and political parties ever since
  • initially, the extension of the franchise to women has little impact, especially within party ranks, feminists and enfranchised women split along the same political and class lines as men
  • an attempt to establish a National Women’s Party but it failed, derided, too elitist, urban, Conservative, pro-war, anti-labour
  • an exception to the “limited gains” rule was the New Era League (NEL) which had close ties to the BC-Liberals, Mary Ellen Smith appointed to the cabinet, first woman in the entire British Empire to occupy a cabinet position
  • another important achievement was the Persons Case, led by Judge Emily Murphy, two-year legal challenge to have women recognized as “persons” and enable them to sit in the Senate
  • also significant is the fact that Quebec feminists won the provincial vote
  • but the experiences of, for example, Agnes Macphail, was limited, like the suffrage movement itself she rejected conventional partisanship, established her political career outside of the party system, on the margins, was a member of the Progressives then the CCF, this limits her impact, not in the ranks
  • level of female participation limited by the same socio-economic conditions that marginalized women in society at large (economic independence, relatively low level of higher education, social pressures regarding marriage and childbearing, and traditional norms that dictate females were unfit for political office)
  • none of the “Famous Five” appointed to the Senate, seen as feminists, King Liberals appoint Cairine Wilson who was seen as more moderate
  • those females elected to the Senate at this time were largely replacing male family members, name recognition, keeping the seat warm for a husband or father, nearly half of the 17 women elected were in this position between 1921 and…?
  • women clustered at the municipal level, attributed to costs (less costly election campaign), manageable travel (close to home), and weaker power (political parties don’t wield the same influence)
  • attempts to remedy the situation at the federal level, e.g. establishment of the Women’s Joint Committee, women to obtain more power within the parties, but weakened because of perception that it leaned too far left, strongly pushed for accessible birth control and for equal pay, and female leadership
  • women’s auxiliaries, e.g. National Federation of Liberal Women, first assembly in 1928
  • Women’s Committee within the PC under the leadership of Hilda Hesson later on
  • activities undertaken like a “ladies aid”, raising money through teas, luncheons, cookbook sales, members performed clerical work, social entertaining, fundraising, explicitly mirrored the gender division of labour in society, not influencing fundamental decision-making
  • observers describe this as “the auxiliary trap”, a ghetto within the established political order, limited participation
  • the egalitarian ideology of the CCF combined with the challenges it was having establishing itself ironically impeded the establishment of a formal auxiliary within its ranks, but large portion involved in the same sorts of activities as the Liberals and PC counterparts
  • CCF claimed to be the best representative of women’s rights in Canada
  • WWII tended to stifle limited success

The Rise of Second Wave Feminism

  • growing sense that more was required, greater opportunity for women within the parties
  • easier said than done
  • 1942: Ontario CCF established Women’s Committee to recruit more voters, but what is the level of influence, how much power, a lot of CCF activists feared that a separate committee would threaten CCF unity, ends up performing the same sorts of “auxiliary” functions
  • NFLW has expanded by the end of the war, more than 100 clubs, extensive membership, a growing number of women being mobilized and integrated into the progress, but the NFLW’s activities to the extent that they dealt with policy were limited to points on welfare
  • PCs formally committed themselves to women’s policy, but they were marginalized, generally speaking they were ignored between elections although called upon to work during the elections
  • ultimately the rise of second wave feminism provoked significant change
  • after the gains of the suffrage movement the Person’s Case, women largely went back to their domestic roles
  • female employment in the industrial sector increased during the war, but then policies deliberately designed to re-establish the “spheres of activity” after the war
  • growing segment of the female population, especially amongst the middle classes, obtaining formal education, encouraged to pursue a career (until marriage)
  • increasing number of women, like Doris Anderson, refused to be forced between the choice of career or family, through her editorship at Chatelaine she promoted this idea, an appeal for more women to run for public office
  • Voice of Women (VOW) a grassroots organization formed to oppose nuclear proliferation and nuclear testing, claimed to be non-partisan, but because of the crisis over the Bomark Missile Crisis, faced with dilemma, same as the first wave feminists, how best to achieve goals: engage or reject
  • 1965: Conference marking the 25th anniversary of women having the provincial vote in Quebec, representative of the Liberal mainstream movement (Federation des Femmes du Quebec (FFQ), more radical ones also existed, e.g. Front de Liberation des Femmes du Quebec (FLFQ)
  • two women in parliament at this time: Grace McKennis (CCF) and Judy LeMarch (Liberals)
  • Pearson government responds by appointing a commission on the Status of Women, in 1970 the report, Committee for the Equality of the Status of Women, goes national, National Action Committee on the Status of Women, goal to enact the recommendations, pressure on government, NAC bridged one of the divide within the women’s movement between the more conservative older generation and the more radical younger generation

The Feminist Challenge and the Parties Respond

  • led to a re-examination of the role of women within Canadian life
  • Liberals advocated a moderate involvement, made sense at the time, the Keynesian era party system, when the state could effect change and best way to ensure it was to influence the parties that were in control, women’s movement call for more women within parties
  • this effort was multi-partisan, strongest with the NDP, but also strong with the Liberal party
  • less visible but equally important was radical feminism, rejected engagement, to sanction a patriarchal position, FLFQ rejects forming a strictly women’s party because it viewed even that as being co-opted
  • major re-thinking of their goals in late 60s and early 70s, women were remaining marginalized, recommended that auxiliaries be integrated within the parties, acting on the recommendations of the Bird Commission the NFLW (31 000 members) replaced by the National Liberal Women’s Commission (NLWC), as opposed to being an auxiliary (separate) it is formally integrated, main tasks are changed moreover, as opposed to “tea-pouring” the new commission was supposed to promote the advancement of women at all levels in the party and in parliament
  • the PCs also moved in this direction, although more slowly, occurs in 1981
  • NDP most immediately effected by second-wave feminism, not surprising, it arose from the left because of the left’s claim of greater equality, reality not matching rhetoric, Women’s Committee in 1961 accompanied the establishment of the NDP, relationships between the established party and the feminists was initially conflictual but they moved towards the centre, e.g. the POW Committee designed to advance the representation of women in mid-70s
  • 1977: PQ established commission for the women
  • more problematic than transforming the auxiliaries was increasing the number of women sitting in the H of C and in the party organization…even today, the higher the fewer!
  • Doris Anderson: the established political order not for her, forced to run against another Liberal candidate for the nomination in a riding even after she had well established herself
  • initial enthusiasm DIES
  • might think that the NDP is more advanced, has had two female leaders, had nominated more women, but mostly done in un-winnable ridings, number in the House no greater than the Liberals or PCs until the 1970s
  • parties shy away from a quota approach of candidates in elections
  • but from the mid-80s and into the 90s, number of women in the house grew significantly, move towards a moderate position, no party sought to become the party of feminism but no party sought to become its antithesis, either
  • the Liberal Order!!!!
  • since the 1990s, the growth in the number of female proletarians has stopped, the number of female candidates being fielded had declined
  • the first-past-the-post system may be serving as a barrier…
  • Doris Anderson became a strong supporter of the PR system in the last years of her life after having studied the European system
  • appears to be more than just a question of numbers, e.g. in 1993 two female party leaders in election, however feminist issues were marginalized, parties seem to be moving towards a symbolic approach, increase the numbers, but when it comes to substantive advancements little progress is made
  • in conclusion, this brings us back to the question of participation vs. opposition: the Persons Case, the Bird Commission, the feminists agenda within parties, the entrenchment of gender equality in 1982…really, we should cease viewing participation and opposition as mutually exclusive, political parties exist to win elections, feminists must mobilize support and then engage with those parties, make it self-interest, complimentary

What’s ‘Left’ To Do?


(look up arguments and first few minutes of material)

From the CCF to the NDP

  • CCF had developed its program during the depths of the Great Depression, did not have the same resonance after WWII, economy booming, unemployment low, under these conditions voters were satisfied with the Liberal’s piecemeal approach to social welfare, living standards seemed to be improving without the election of the socialists
  • degree of “red scare”
  • CCF of decreasing relevance
  • each election after 1945, CCF lost progressively more support, peaked in 1944, and then dropped in four subsequent elections
  • leader MJ Coldwell defeated and deputy leader Stanley Knowles defeated
  • seems headed for the same fate as American Socialist Party (oblivion)
  • party morale and membership falling
  • ability to find funding (to mount election campaign) restricted
  • as a desperate holding action, issued the Winnipeg Declaration at the height of the Cold War, reflected a worldwide defeat on the best means to achieve socialism and what kind of socialism it should be (more communist or more liberal), reflected a shift away from the radical Regina Manifesto, moderation, e.g. dropped the promise to eradicate capitalism, endorsed the mixed economy, government intervention but private sector endorsed, shift from government ownership (nationalization) to the promotion of social welfare (low-cost housing, post-secondary education funding)
  • this was a tacit acknowledgement of the strength of the post-war consensus on reform liberalism
  • hope that a more moderate image would attract voters, shift towards the centre
  • sought to forge ties with the expanded industrial force, shifting from its Western rural roots, attempt to seduce industrial workers, encourage the more Conservative union leaders to support the CCF, reflects the fact that the relationship between the CCF and organized labour had been problematic, e.g. in Ontario there was joint action between them but it was limited to the electoral period, rarely any substantive cooperation, union support for the CCF at the level of individual membership was lacklustre
  • because significant portion of the CCF feared a close relationship because they thought the unions would come to dominate the party and members usually voted Liberal or Conservative
  • begin to shift towards greater cooperation in the postwar period, especially in light of electoral setbacks, encouraged CCF to seek out the support of organized labour
  • 1940: merger of more radical unions to form the Canadian Congress of Labour, a rival federation, could challenge the Trades and Labour Congress which was more Conservative
  • TLC: growing number of CCF supporters, including Claude Jodoin, president of the TLC, discreet CCF supporter, important because his presidency paved the way for the unification of the more radical CCL and the more conservative TLC into a new broad union federation, the Canadian Labour Congress, 1956
  • shock of the CCF’s electoral defeat in 1958, push for cooperation, proposal for creation of a new party, vehicle for a new broad based political movement that would incorporate in a significant way the labour movement

The Founding of the NDP

  • took 3 years to bring about a formal alliance between the CLC and CCF
  • 2000 candidates descend on Ottawa, from the CCF and unions and new party clubs, lobbying for a new alliance, this convention succeeds in establishing the NDP
  • Premier Tommy Douglas drafted as the first leader
  • the impact of the alliance was limited by the fact that in 1961 less than one-third of the non-agricultural workforce was unionized, 75% of union members continued to vote for the Libs or Cons, never really produced poll results, most significant contribution was financial, NDP could rely on organized labour for funding, but trade unions banned about three years ago from making contributions
  • movement towards the centre appeared to make a difference
  • Douglas defeated in the election, but share of popular vote increased, 13.4% of the votes and 19 seats, best result since 1949
  • won power in MB, SK, BC before the end of the decade

The Movement vs. Party Dilemma

  • “movement to Party” thesis or “protest movement be calmed”: two conflicted antagonist elements in the CCF and NDP, the first being a social movement favouring a more principled, doctrinaire approach, shaping policy and the public discourse; the second is the party element, pragmatic, willing to compromise to obtain power
  • this thesis articulated by Walter Young, “Anatomy of a Party”, argues that the establishment of the NDP reflects the pragmatic element increasing, says ultimately the NDP has evolved into a party like its competitors, want power, willing to compromise
  • this is consistent with a broader element in political party, as left-wing parties mature, especially the leaders, they are increasingly driven by a ruthless desire for electoral success
  • Antonia Maioni argues that in comparing America and Canada in health care reform, presence of the CCF/NDP led to a much more comprehensive system of health care in Canada than in the US, it makes a difference
  • McKay is more cynical, decries the fact that the new democracy has been contained and ultimately defeated through the conciliatory approach of the established liberal order, compromise to form a limited social safety net, deflected the challenge from the left
  • symptomatic of this movement was a disruption in the NDP caused by the challenge from the party’s left wing in late 60s/early 70s

The Waffle Movement

  • consistent with the shift towards the centre, the references to socialism in the New Party Declaration were downplayed, also differs in another way, a lot more references to nationalism, concern about independence and autonomy of Canada, consistent with the rise of Diefenbaker and the Liberal’s response, rise of the Parti Quebecois, playing a greater role all over, NDP had to react to the advancement of globalization
  • nationalist reaction was a major cause of the radical leftist movement “the Waffle Movement”, strongly ideological
  • name: a meeting of radical leftist members of NDP, in the course of their discussions, debate over a specific issue, “waffle to the left”
  • definitely symptomatic of the movement element of the NDP, argued that the NDP needed to adopt a much more radical program to respond to the growing presence of America in the economy, a threat to Canadian independence, inspired by the significant popular demonstrations in Paris in 1968 and new left movements
  • foremost spokesmen were Laxer and Watkins, argued that nationalism and socialism were inextricably linked, if an independent socialist Canada was to be achieved, NDP had to be an agent of both, Canada owned by Canadians, advocated nationalism of all major industry, fundamental redistribution of all decision-making powers
  • much more assertive socialism of the CCF in 1930
  • provokes a reaction from the NDP establishment, the mainstream, deputy leader Lewis and Ed Broadbent, criticized the Waffle Manifesto for its strongly anti-American tone, emphasising public ownership, a question of political pragmatism, what would happen in terms of public support if the Waffle gained ascendance in the NDP
  • “Marshmellow Resolution”: it is soft and mushy response, the most advanced economical position, but rejected as too moderate by the Waffles, provincial Waffles emerging in ON, BC, SK
  • David Lewis especially concerned about the Waffle implications, feared the radicalism would undue all post-1930 efforts to become a mainstream social democratic party, alienate organized labour, keep the NDP from winning elected office
  • 1971 leadership convention: Lewis replaces Douglas, determined not only to win the leadership but to discredit and marginalize the Waffle, reassert the influence of the mainstream leadership of the NDP, but unable to do so, a lot stronger than anticipated, James Laxer (also leadership candidate) comes in second place, real grassroots challenge going on within the NDP
  • leadership losing control over party
  • members of Waffle having increasingly tense relationship with organized labour
  • unions threatening to withdraw their financial support (one of the very reasons for the NDP’s formation)
  • 1972: Waffle is effectively purged from the ranks of the NDP, “waffle was toast”
  • years following the disruption a period when pursuing the pragmatic course appeared to pay dividends for the NDP
  • 1972 federal election: Libs fall to a minority position mainly because voters attracted to the economic nationalism of the NDP, Lewis conducted effective campaign against corporate welfare funds, and NDP holds the balance of power in parliament until 1974 until Trudeau Liberals engineer their own defeat, the alliance resulted in a number of measures like the establishment of the Foreign Investment Review Agency (FIRA) mandated to review and with the power to reject any potential foreign takeover of a Canadian form, also established the Canadian Development Corporation, tasked with buying back Canadian companies, also Liberals began indexing pensions to reflect inflation, also take the first steps in establishing Petro-Canada 
  • this seems to have been the high point, NDP more successful than the CCF, average of 17% of the popular vote between 62-88, above the CCF’s average of 11.1%, it has undergone considerable existential angst 
  • mid-1980s: under Broadbent, the party witnessed a new high, by 1987 Broadbent was the most popular leader in Canadian politics, predictions that they would form the official opposition, attracting left-leaning Liberals and the working class, speculation that the Liberals would be marginalized, battle between left and right eventually
  • Free Trade election of 1988: NDP won all-time high of 43 seats, but all of these seats West of Quebec, failed to achieve Official Opposition status
  • resurgence of the “principle vs. pragmatism” debate
  • Broadbent blamed for taking a pragmatist approach that allowed Liberals to take an anti-free trade vote
  • Steven Lewis (David’s son) argued that the NDP had to return to its traditional role as the “conscience of the nation”, change public policy, not obtain power
  • following the upset in ON, 74 seats in 1990, first time an NDP government formed east of MB, Rae was a pragmatist, wanted to make the NDP a more centrist/left of centre political vehicle, transform the NDP from a permanent party in opposition, subsequent difficulties of the ON and federal party reflects the fact that the NDP has been unable…
  • throughout its history, the CCF/NDP has moved towards the centre, reflects the strength of liberalism in Canadian politics, in trying to reconcile its rival vocations as a movement and political party, the NDP could end up being neither

The Medium is the Message: Politics in the Television Age

Main Arguments:Television had a fundamental impact on party politics in Canada, leading to the ascendancy of image over content; this trend was most dramatically manifest in the 1968 phenomenon known as “Trudeaumania”;

Television had a centralizing effect on party politics in that it provoked a greater attention being paid to the leaders – as evidenced by the media event that is the leader’s tour during election campaigns – to the increasing exclusion of regional lieutenants and local candidates;

Paradoxically, while television had a centralizing effect through its encouraging greater attention to the leader, it also provoked attempts to ensure (at least the appearance of) more transparency, accountability, and grassroots participation.

  • Television on the Rise: The Diefenbaker-Pearson Era
  • Politics as Spectacle: The Trudeau Era
  • Television’s Impact (1) Follow the Leader (2) Democratizing the Parties

Recent Example

  • Harper’s pre-emptive attack ads on Dion

Television on the Rise

  • 1951: only 1% of Canadian households had a TV set, a decade later it was 83%, more people than had flushing toilets
  • the pipeline debate played out on the new TV sets, contributed to a growing impression among voters that the Liberals had become too comfortable in office and too complacent in power
  • to the advantage of the PCs, Diefenbaker’s rise, took advantage of the medium
  • federal campaigns of 57 and 58 were in the first in which TV was extensively used, Diefenbaker delivered his populist message, evangelical sincerity, came across as genuine on TV
  • sound clips, abbreviated, nightly news, Diefenbaker speaking, anti-Liberal anti-establishment populist message, just the right length, message delivered but without logic behind it, more convincing than seeing him in person
  • new dynamic in the relationship between the parties and the press, turned journalists into media celebrities
  • DePoe become the first of the CBC celebrities, first who could compete intellectually with print media, well versed
  • rival between print and electronic media, more demanding press gallery, confrontation, pressure on print media to become more critical 
  • also brought about Diefenbaker’s downfall, as time went on the image that he projected was increasingly negative, had a tremble in his hand, Parkinson’s speculation, a man in decay, became synonymous with the image of his government, both in decay, loses the support of the electronic and the print media, days numbered after that, loses the 63 election
  • symptomatic of “image politics”
  • Canadian parties turn to private polling and advertisements in the form of Kennedy
  • Pearson surrounded himself with younger generation media-savvy strategists, notably O’Hagan and Davey
  • Liberals hire Kennedy’s pollster, Harris, indicated that Pearson perceived as an academic smart-alleck, had a high-pitched voice, noticeable lisp
  • a bit of a dumbing down of political discourse, look for material about the candidate’s family for image
  • 1965 federal election the last one not totally dominated by TV, but still 91% of households owned one, so Pearson spends a good deal of time in training, but he did not exude the charisma, increasingly the media was hostile to the Liberals and their attempts to mimic an American-style campaign, Pearson no Kennedy
  • this is the context in which Trudeaumania is possible

Politics as Spectacle: The Trudeau Era

  • style, showmanship
  • first PM able to manipulate the power of TV to his own advantage
  • path to power paved with iconic TV moments, e.g. the constitutional dual between Johnson and Trudeau and Trudeau standing up to demonstrators throwing rocks 
  • shown being mobbed by crowds, adored by women, created by both the Liberals and the media, images
  • most of the media swept away by the image they were helping to create, “too good to be true”, sparkling, like a new car
  • in contrast to Stanfield, eating a banana and fumbling a football, Trudeau was kissed by women and slid down a banister and dressed like a pimp
  • TV demands something more exciting than a person behind a podium
  • Stanfield and Douglas may have been correct in their assessment of Trudeau: all image no substance, but they underestimated the power of the image, the TV audience saw a dynamic leader

Follow the Leader

  • Liberals began to select their leaders by convention in 1919; Conservatives in 1927
  • relatively pre-ordained, sure of results, a foregone conclusion, not a big media event
  • with the advent of TV, Libs and Cons begin holding larger conventions to bring the party’s grassroots into the process, power of mass movement, showcase the political parties and their policies
  • 1967 convention that saw the ousting of Diefenbaker for Stanfield and the election of Trudeau on the fourth ballot
  • focus the voter’s attention on the leader, public persona, image, elections became contests between packaged party leaders, e.g. who won the debate 
  • 1968: first televised leader’s debate
  • Turner and Trudeau’s face-off, “I did not have a choice / “You had a choice, sir”
  • relationship between political parties and newspapers: the electronic media made this manipulation easier, communications strategists, advertising firms, pollsters, ads, catchy slogans, staged photo-ops, much more of a professional activity
  • TV offered the illusion of personal contact, but in fact less face-to-face contact, decline in the emphasis on policy positions
  • at the heart was the leader’s tour
  • emphasis on ability to capture the day
  • symbolic cues, language, visual images to convey messages subtly and less subtly, e.g. Harper at a hockey tournament, the leader you identify with
  • Maggie Trudeau campaigns alongside her husband, Trudeau is a gentle father
  • the only time local candidates received attention was when the leader visited the riding
  • the mass media may be inadvertently hastening the end of political parties
  • alerted the nature of political parties and the landscape of politics
  • mass media replaced mass mobilization
  • parties once relied on hierarchical system of inter-personal links (partisan campaign and organization to spread propaganda and collect political intelligence, grassroots the eyes and ears, as were the MPs)
  • with the advent of TV, professional polling, party elites can communicate directly and collect information without party organization or MPs, a bunch of nobodies

Democratizing the Parties

  • paradoxically, another outcome
  • extra parliamentary organizations that the Libs and Cons employed
  • if only to increase the appearance of legitimacy
  • e.g. televised leadership conventions 
  • membership of the Con party hold accountable and review their leader (Diefenbaker)
  • contributed to the first electoral financial reform, previously minimum regulation, limited to a ban on individual candidates receiving direct donations from trade unions and corporations, parties themselves getting 90% of funding from these sources
  • combined with the high cost of media, controversial style of journalism, need for electoral expense reform
  • Election Expenses Act, 1974, to increase transparency and accountability, tight limits on election expenses, limit the potential influence of money, create greater opportunity for individuals to run for office, reduce corporate influence, get individuals to contribute, encourage individual participation, for the first time public funds used to finance political parties in addition to subsidizing part of the election costs, establishment of a tax credit to encourage people to donate, all this represented a shift, increasingly political parties were becoming less vibrant organizations, operating within the public sphere, increasing ties 

Haunting Us Still? The Legacy of Trudeau Liberalism

  1. Trudeau-era Liberalism, with its efforts to assert the power of the central government, assert Canadian independence, and contain the centrifugal forces (e.g. Quebec nationalism) that were leading toward greater regionalization, was consistent with the nationalist response to globalization’s impact on Canada – and as such, maybe seen as the last concerted attempt (to date) at a comprehensive pan-Canadian nationalism;
  2. Trudeau’s electoral success almost came in spite of himself – his position as an outside to the Liberal Party, and his disdain for campaigning led to an often tense relationship between Trudeau and the Liberal Party establishment;
  3. The Trudeau Liberal answer to the “national question” ultimately could not overcome the challenges to it from within and without, so that its main aspects ultimately went unfulfilled (or were undermined), and the Liberal Party was soundly repudiated in the 1984 election.
  • Background: ‘National’ Crisis and the Rise of Trudeau
  • The First Trudeau Mandate
  • Trudeau Liberalism after Trudeaumania
  • The Clark Interregnum and Trudeau’s Return
  • Haunting Us Still?

Quiet Revolution

  • Quiet Revolution
  • development of a new Canadian flag
  • Diefenbaker increasingly a liability and embarrassment to the PCs, trailing in the polls behind the NDP, nasty internal battle, replaced by the more Quebec-friendly Stanfield
  • Pearson Liberals took a more conciliatory approach, e.g. Commission on Bilingualism, attempts to enhance the francophone presence in government administration, pursuing a policy known as “co-operative federalism”
  • Trudeau made clear his opposition to according Quebec a special constitutional status, much less independence (negative half of the equation)
  • Trudeau also made demands on English Canada, he wanted to make Canada broad enough to accommodate francophone ambitions within and outside Quebec, imposes official bilingualism, the Bill of Rights (to protect minority and linguistic rights)
  • somehow there would be a sense of nation, all Canadians would hold in common certain rights, Liberal idea of nationalism, Canadians would not define themselves by race or religion but by shared rights
  • “just society” – reform liberalism, increased social and economic justice for all Canadians
  • the old Liberal establishment had been usurped
  • Trudeau’s idea of participatory democracy: vague, but idea that Liberal Party activists were going to have a more active and direct say in the goings on in governance
  • Trudeau seen as the ideal male to champion federalism, new man, new idea, to safeguard Canada’s future
  • Liberal Party reinvigorated, people had thought it would disappear, left-right struggle
  • Trudeaumania linked very closely to the crisis, helped to sweep them back to power, majority government, first time for the Liberals since 1953

Trudeau in Office

  • Official Languages Act, 1959, enacted bilingualism at the federal level, institutions more open to francophones, increase influence, more opportunities
  • dubbed “French power”
  • but at the same time, breaks with the more accommodating approach of Pearson and fights fiercely against any measure perceived as an attempt by Quebec nationalists to erode federal power
  • as for Constitutional reform, 1971 negotiation led to the Victoria Charter, looked like Canada was going to patriate its constitution from Britain with a limited entrenched Bill of Rights, but it falls through, Quebec premiere rejects it, Trudeau puts the Constitution on the backburner, did not want to open it up and deal with calls for more power from premieres
  • the promise of a “just society” is relatively unfulfilled
  • main task seems to be lowering the expectations of Canadians as to what should be expected from the welfare state, e.g. Canada pension plan, discussed in readings
  • by 1972, growing disillusionment, mixed record, not much delivered, the PM increasingly criticized for his arrogance
  • more broadly, concern about the centralization of power in the PMO, which is gaining influence over Cabinet
  • federal bureaucracy increases three times faster than the rate of population growth, government expanding, yet nothing much getting done
  • electorate increasingly of the view that Trudeau not really offering a fresh approach nor accomplishing much, social policy, fiscal policy, foreign policy, examined but hardly altered
  • Trudeau’s ability to alienate virtually every major group, e.g. War Measures Act infuriated Quebeckers, the West is furious over official bilingualism
  • this is the context for the next election
  • rough ride made even worse because the centralization of power came at the expense of the extraparliamentary wing of the party, Trudeau had neglected it as an organization, he assumed that everyone would come out at election time because they were Liberals, but volunteers stayed home, staff in the PMO vetos and overrules the Liberal Party brass, but they had little campaign experience, result was a disastrous campaign, Trudeau himself is a poor campaigner, sees it as beneath him

Trudeau Liberalism after Trudeaumania

  • Liberals have 109 seats, only two more than the PCs
  • nearly half of Quebec voters had voted Liberals, had half of Quebec’s 75 seats, needs English support, appoints John Turner (right-wing) as the Finance Minister to appease the business community, enters into alliance with the NDP because a lot of traditional Liberal voters had moved to the NDP, this alliance produces more progressive legislation in 18 months than in the previous 4 years, Trudeau also gets rid of the technocratic intellectuals and brings back professional politicians, the backroom boys, especially a group of Toronto Liberals charged with rebuilding the organization and teaching Trudeau how to be a politician
  • Liberals the underdogs in 1974, unlike the “intellectual conversation with Canadians” of 1972, he applies the lessons, he campaigns in a highly effective strategy, focuses on the trust that Canadians have in him as a leader as opposed to Stanfield (football-fumbler)
  • Liberals win 141 seats, majority, victory comes at the expense of the NDP who lose half their seats, won back their supporters, a second chance
  • in terms of the challenges of the day, inflation at 14% annually, rising unemployment, fiscal situation out of control, government not taking in enough money
  • Trudeau flip-flops on the issue of wage and price controls, imposes them in 1975, casualty is the Liberal Party’s credibility and John Turner’s, first in the series of high-profile departures
  • for the first time in 50 years (Depression), Liberal times are bad times, Liberals had secured a reputation as the party of good economic times and opportunities, social legislation, but things falling apart by the end of the 1970s, they could not cope with the challenges, at their lowest popularity since the Depression, matters furthered aggravated by the fact that the Liberals drifting from their reformist approach
  • Nov 1976 election of the PQ temporarily reversed falling fortunes, Trudeau able to assert himself again as the champion of national unity
  • plan to call an early election to capitalize on this
  • but Trudeau said no, his marriage had fallen apart, he did not have the energy or the stomach, lost opportunity
  • instead another attempt at Constitutional reform…that falls through
  • 1979 the Liberals go to the polls, climate of rising crisis
  • Trudeau perceived as overly pre-occupied with the Constitution, not the solver of the problem, but the problem itself

The Clark Interregnum

  • PCs make the economic situation the primary campaign issue and win
  • Liberals take 67 of Quebec’s 75 seats but only win 114 seats across Canada
  • Trudeau leads the opposition
  • lacklustre effort, infrequent appearances in the House, Trudeau finally resigns, he had failed to realize Constitutional reform, his bilingualism policy was unpopular, the “just society” seemed more distant than ever, economy in ruins, Trudeau was a failure
  • the fact that the Liberals did not have a leader encourages the PCs to govern like they have a majority, 7 months in release budget, “short term pain to achieve long-term gain”, a 4-cents a litre tax on gas
  • Liberals emboldened, combine with the opposition, go into an election
  • a leadership campaign underway to replace Trudeau

Trudeau’s Reform

  • Clark government so unpopular that Trudeau the most electable leader again, Liberals ahead in the polls, after a week of suspense, Liberal Party establishment agrees that he will return as leader, a carefully managed campaign, Trudeau kept under wraps, didn’t want voters to remember why they had voted him out
  • Liberals win every seat but one in Quebec
  • a rare third chance
  • it is perhaps this last Trudeau government that is most prominent in historical memory, everything that it had promised to be
  • three months after election victory, makes crucial intervention in 1980 referendum, instrumental in defeating Levezque’s “Oui” side, promises that a vote for the no is not a vote for the status quo, promises that a vote for federalism is a vote for substantial constitutional reform
  • Trudeau engages in a bitter battle with the provinces for the patriation of the Constitution and the Charter, appears to have succeeded in realizing a national vision for Canada, redeem himself
  • but economic problems: onset of a serious recession in the 1980s, double-digit unemployment and interest rates
  • PCs dump Clark, replace him with Mulroney
  • Trudeau Liberals sinking in popularity, he announces his resignation, Liberal party members were wanting a more active role in the party, happy to see him go, especially as party fortunes declining, turn to John Turner, who re-enters politics, a symbolic break with the heritage of the Trudeau era
  • party gets a post-convention bounce but Turner makes the mistake of going to the polls quickly, not having established his own track record in office, the Turner Liberals painted with the Trudeau brush in voters’ minds, plus confirms Trudeau’s patronage appointments, a disastrous campaign, e.g. slaps women on the bottom and refuses to apologize, Liberals suffer greatest defeat in history, elect only 40 members (ten more than the NDP)
  • Mulroney Tories win 211 seats, greatest majority government in history
  • the verdict of an electorate exhausted by Canada’s existential crisis and the tough economic times, more broadly it draws attention to the legacy of the Trudeau Liberals: achievements made without Quebec signing the Constitution, this will come back to haunt Canadian politics, in a perverse way, measure that was supposed to strengthen unity in fact alienated Quebec
  • as for the “just society”, the 9-fold increase in spending racked up debt, successors undermined the welfare state that had been built up
  • record of the Trudeau Liberals is paradoxical, haunts us

The Rise of Neo-Conservatism: From Trudeau to Harper

Main Arguments:


The Origins of Neo-Conservatism

  • economic breakdown in the 1970s 
  • Western economies faced to respond to something that economic theory had not predicted, rising prices at a time when the economy was staging and unemployment was high, Keynsian theory had these as mutually exclusive
  • buying power and savings reduced
  • in response, neo-conservatism preached a renewed faith in the classical laissez-faire system and the free market, e.g. Milton Friedman argued that the role of the state should be curtailed, return to a situation more akin to the system prior to the Depression, the state should only safeguard the currency, keep inflation low, proposes a monetarist policy that involves high interest rates, reduced government spending, privatization of state assets, deregulation of the private sector, rejects concern with full employment
  • provides a response for the political class that did not know how to respond to the crisis
  • corporate interests stood to benefit greatly from it
  • by the 1970s, breakdown of the reform coalitions, e.g. the New Deal in the US, disaffected Liberals turning towards right-wing parties, occurs in the UK, in Canada
  • neo-conservatives able to construct new coalitions with voters disenchanted with the political and economic consensus that had been working since 1940s
  • general right-wing shift to a position that shared more in common with classical liberalism
  • Conservative Party in UK led by Thatcher, Republican Party led by Reagan, both able to gain legitimacy among non-elite voters by constructing a new narrative about who the people’s enemies really were, a redefinition of social interests, corporate interests had been vilified, neo-conservatives saw enemies as those who supported the welfare state, proposed tax cuts, and the non-market distribution of social welfare 
  • they successfully linked the malaise of the 1970s and the misguided attempts to engineer social and economic equality through the welfare state

Neo-Conservatism in the Trudeau Era

  • corporate profits skyrocket in the early 1970s, profits soar more quickly than wages, this provokes a series of labour disputes
  • forced with having to pay out so much in wages at a time when there seemed to be an economic downturn, major corporations began laying off workers
  • Trudeau government injects money into the economy in response, kick-start the economy, but rising unemployment and the increased money in the private and public sector makes inflation rise at the same time as rising unemployment, stagflation takes told
  • deteriorating situation prompts the Liberals to adopt neo-conservative measures, e.g. Turner’s appointment as Finance Minister reduced corporate taxes, denied government the money to fund the welfare state, put an end to rising expectations
  • early 1978: Canadian dollar lost 15% of its value against the US dollar, unemployment up, double-digit inflation, deficit approaching a record level
  • economists, voters, Conservatives blamed Trudeau’s over-spending
  • Trudeau returns from the G7 conference in July 1978, during this conference he had discussed the need for left-wing governments to be more fiscally responsible, introduces a mini-budget that cuts spending
  • what was billed as a bold program to turn around the economy was largely cosmetic, symbolic, ultimately alienated the left in Canada, fighting the situation on the backs of the poor, the more right-wingers not impressed by the failings 
  • after Trudeau’s return in power in 1980, government had a change of heart, bucking the neo-conservative trend, tried to reduce the US presence in Canada’s economy, combined with the recession of the 1980s, ever-increasing deficits, debt
  • growing momentum of compound interests

Progressive Conservatives and Neo-Conservatism (or Red v. Blue Tories)

  • in the context of high unemployment, double-digit inflation rates, voters turned away, embraced the neo-conservative agenda, in an era of accelerating globalization, the Liberal nationalist appeal no longer evoked the same kind of response, shift in public opinion
  • explains why Turner elected after Trudeau, more of a blue grit
  • like their Conservative counterparts throughout the West after WWII, Tories had difficult coming to terms with the reform liberal consensus, red Tories, by no means anti-capitalists, were supportive of the free market, but more willing to accept an activist interventionist state to preserve social order and strengthen community
  • Stanfield was the classic red Tory, argued that any civilized society was concerned with the well-being of the less fortunate
  • Clark argued that the modern world needed both an active government and strong communities, however he was more willing to champion the market liberal position, more right-wing than Stanfield, called for the privatization of Petro Canada in the 1979 election, budget inspired by N-C economic theory, balancing the books the goal, opposed to nationalist interventionism of the Trudeau Liberal
  • Red Tories increasingly under siege in their party, election of Mulroney a sign of ascending neo-conservatism in the party and an increased openness of the voters to the agenda
  • Michael Wilson, finance minister: deficit reduction, privatization, deregulation, get the government out, let the market operate as freely as possible
  • Mulroney: “Canada is open for business again”
  • limits to the N-C trend: Mulroney Tories did not go as far as Britain or America, part of this the fragility of the coalition that had brought them to power, Quebec not as N-C, result was the cuts to social programs were nowhere near the levels encouraged by some lobby groups and think tanks
  • high interest policy meant the cost of servicing the national debt increased, what ends up happening is the structure of government spending begins to change, the money being spent had more to do with servicing the debt than with maintaining the welfare state, programs decline significantly
  • tax reform in the second mandate, reduced the progressive nature of income taxes, implement the GST, both of these tending to benefit the upper-income strata at the expense of the lower-income strata
  • free trade most significant
  • MacDonald Commission: because of the failure of the attempt to diversify trade and increase ties, Canada’s economic prospects revisited, 1985 report to the Mulroney government argues that Canada should pursue a comprehensive free-trade agreement with the US, trend towards continentalism, Tories embraced it, agreement reached in January 1988
  • the election that year incredibly emotional, Liberals opposed it, championed the Canadian nationalist cause, argued that free trade would led to the dissemination of the east-west economy and the very basis of Canadian sovereignty
  • they won the battle but they lost the war, Liberal and NDPs won 52% of the vote, but Tories win another majority with 43% of the popular vote, free trade enacted
  • passage of the FTA created an impotence for pursuing the neo-conservative agenda, greater concern about ensuring Canada’s economic competitiveness, Conservatives terminated mother’s allowances, the universality of old-age security, the amount of money transferred to the provinces for social spending is capped, by 1989 corporate taxes only 9% of government’s revenues

Impact at the Provincial Level


  • PCs in power since 1971 under Peter Lougheed until 1985
  • ran activist governments, interventionist, in support of the AB business community, undertaken to diversity the resource-based economy, facilitate economic development
  • AB Tories preside over the collapse of several firms that had received significant government support, suggestion of corruption, fuels an anti-government feeling in AB, leads to calls for the AB government to remove itself from economic affairs
  • reinforced by the late 1980s deterioration of AB’s finances
  • a gradualist approach taken, hope that the government will ride it out, but cannot, amid tax increases and growing debts, cuts to public services, Gerry resigns, succeeded by Ralph Klein
  • Klein distanced himself from his predecessor, more avowedly conservative, argued AB weight down by an oppressive public sector, did not jive with the global economy
  • low taxes would attract businesses to AB, apparent success of Klein, balances books within three years, contribute rise in ON


  • NDP won a majority under Rae just as a recession began, initially they bucked the N-C trend, first budget by Floyd Loughren provided no spending cuts, argued that the recession would not be fought on the backs of the poor
  • however, the economy did not turn around quickly and so the Rae government’s room for manover was immediately and severely restrained, as the recession deepened, switches to a deficit-reduction policy, consistent with N-C principles
  • e.g. new labour code, introduces the social contract, meant to reign in government spending, imposed salary cuts on civil servants, forced them to take up to 12 unpaid days of leave per year, Rae Days, public sector balks
  • the NDP’s alienation of its main support wing paved the way for Mike Harris
  • the PCs were a centrist party, they were in the red Tory tradition, but Harris shifts it right in the example of Ralph Klein, campaigned on a N-C platform, “Common Sense Revolution”
  • cut income taxes by 30% over three years, to pay for this closed hospitals, cut education spending, shitfed welfare spending to local governments, repealed labour laws

The Federal Level: From Blue Grits, to Reform, to the Conservative Party

  • Liberals sign a FTA with Chile, make progress on the unrealized FT with the Americas
  • inclined Canadians more to the view that Canada needed to be more business-friendly, less distributive, more dramatic spending cuts as Martin promised to eliminate the deficit, accomplished by the late 1990s
  • political factor that contributed was the rise of the Reform Party, in its short lifetime managed to win only one seat east of Manitoba and the majority of its seats in two metro areas, had a huge impact, reduction of the welfare state a reform policy before taken up by the Liberals
  • without achieving federal power, it contributed to its retrenchment in the 1990s
  • Reform: tougher line on law and order, government spending, welfare state, argued for emphasis on individual rights as opposed to group or collective rates, called for an end of government support for multiculturalism, pay equity programs, and bilingualism
  • also increasingly reflected a social conservative view, opposed gay rights
  • “Fresh Start for Canadians”: traditional family values, tougher law and order
  • attempts to unite the right in the late 1990s, it appeared increasingly that Reform would have to moderate its N-C image, what remained of the PCs after the 1993 election had appeared marginalized for once and for all its red Tory elements
  • under Jean Charest, a much more emphatically N-C agenda, growing under Mulroney, but reached new heights under Charest, except for certain social issues and the Quebec issue, they were the mirror image of the Reform Party
  • Joe Clark returned as PC leader, tries to return party to its more traditional roots, spurned the overtures from the Reform Party and the Alliance, too ideologically right of centre, however this apparent revival of red Toryism was fleeting, under pressure to co-operate
  • eventually Clark forced to come to terms that he was out of touch with the party he was leading, resigned leadership in 2003, succeeded by MacKay in 2003, merger, the Conservative Party of Canada
  • represented a victory of the N-C position…until this week’s budget

Trudeau Article

  • legacies of Trudeau in English and French Canada
  • credit and blame to a single politician, the role of the media

Neo-Conservativism Article

  • response to globalization
  • marrying of social and fiscal conservatism
  • are they not mutually exclusive?
  • Harper’s budget suggests that either you must make sacrifices in a minority government OR the resurgence in Canada is minimal and we will always value social programs
  • who benefits from globalization?
  • reform liberal consensus at the end of the Depression…now political parties championing shades of neo-conservativism…survival instinct (pragmatism)

The Quebec Question and the Canadian Crisis

Main Arguments

  1. Quebec party politics from the 1970s onward was polarized over the “national question” regarding Quebec’s political future;
  2. The “beau risqué” attempt to achieve an enduring constitutional settlement in the 1980s failed, resulting in the resurgence of the Quebec separatist movement, and the appearance of new political parties, the most significant being the Bloc Quebecois and Action Democratique de Quebec.


  1. November 16, 1976: The Road to PQ Victory
  2. The Not so Beautiful Result of the ‘Beau Risque’
  3. The Quebec Question and the Canadian Crisis: Party Politics, 1990-5

The Road to PQ Victory

  • Liberals launched large-scale public works problems including superhighways and the James Bay hydroelectric project and the facilities for the 1976 Olympics
  • also some nods from Bourassa to social democracy, e.g. medicare
  • but rapid and intense struggles with labour, notably the strike in 1972, following the incarceration of three leaders more labour unrest, social agitation
  • as the October Crisis demonstrated, the question of Quebec’s political future could not be avoided
  • Bourassa Liberals determined to defend their own and Quebec’s autonomy from the Trudeau Liberals, refused to abandon the nationalist field to the PQ, positioned themselves as defenders of Quebec’s constitutional powers and its cultural sovereignty within Canada, e.g. rejected the 1971 Constitutional Charter and infringement on its culture
  • the UN leader Bertrand replaced by Loubier who tried to revive UN fortunes, changed name to Unite Quebec, brought in a new slate of candidates, but failed to get any elected, squeezed between the Liberals and the PQ, UQ did not have a clear reason for existence, lost supporters to one or the other
  • PQ trying to achieve greater success, translate popular support to seats in the National Assembly, after 1970 emphasized its social reform and social democratic aspirations over sovereignty, Bourgault said that PQ was to be the liberation front (cultural, political), a population to undergo national liberation, but also had Levesque who was less radical, growing pains, internal tension
  • Leveque has to separate PQ from the violent labour movements in order to see success, in 1973 brings in 33% of the vote, a significant political force, the Official Opposition, although actually down from 7 to 6 seats because of the first-past-the-post system
  • Bourassa Liberals benefited, won 102/110 seats in the NA, with such a massive majority they could only go down, they staggered from crisis to crisis, did not respond effectively to the labour movement, did not control spending on James Bay and the Olympics, growing charges of patronage, Bourassa “the most hated man in Quebec”
  • one of the most contentious issues: Bill 22 making French an official language of Quebec, this united Quebec against the Bourassa Liberals, the anglo- and allo- phones were opposed to restricted English school access and the required French proficiency in professions, but Quebec nationalists thought the law did not go far enough
  • Bourassa called an election just 3 years into the mandate, 1976, figured the situation was bad but could only get worse, the campaign was a Liberal disaster, had to contend with a resurgent UQ (back to UN), the UN benefited from the opposition to Bill 22 and split the federalist vote to their benefit, just what the PQ needed to overcome its internal divisions, PQ promised to hold a referendum before any action was taken, that was a victory for the pragmatic wing, permitted those Quebec voters who were not necessarily in favour of sovereignty-association to nevertheless vote PQ, “etapiste” approach, step-by-step, promise to stand up to the Liberals, expand social services
  • the results come in, PQ majority, to Levesque’s surprise, 71 seats and 41% of the vote
  • one of the PQ’s most important bills was 101 that made French the sole official language, no opportunity for English to be used

The Not so Beautiful Result

  • had to contend with a re-invigorated Liberal party under Claude Ryan, but not especially effective in mounting an opposition to the PQ’s referendum in 1978 (?)
  • at the federal level, Trudeau Liberals had fallen from party, Clark in a minority position, but falls in 1979, ironically, he comes back to power and the referendum fails
  • the unilateral actions by Trudeau contributed to the PQ being re-elected in 1980
  • PQ came close to launching a federal wing but wary of a Quebec nationalist party participating in the federal arena, would suggest compliance, not what Levesque wanted to do, knew how nationalist blocs had fared in federal parliament, did not want a repeat, so PQ members were advised to either vote for the Creditists or abstain from voting, one of the reasons why Trudeau swept Quebec in the 1970s, the opposition stayed home
  • PQ registers itself as a federal party in Sept 1982, Levesque this time supports it, but highly contested among some elements, and reverses it soon after
  • new leader of the PCs changes the notion that Quebec is a political wasteland for the Tories, Mulroney’s arrival changed the PQ equation regarding the federal level
  • PQ government increasingly unpopular, leadership reverses its decision to run federal candidates, instead the pragmatic Levesque took “the beautiful risk” of support Mulroney
  • PQ was respond to Mulroney’s promise to rectify the bad Constitutional deal and his promise to amend it in a matter that would satisfy its aspirations and sign it with “honour and enthusiasm”
  • result in 1984 was a historic shift in Quebec voting patterns, the Mulroney Tories won 58 of Quebec’s 75 seats, from 13 to 50% of the popular vote, not just the death of a regime but the first of a new pan-Canadian coalition, seen in the Diefenbaker Tories and Macdonald
  • hastened the demise of the PQ government, serious labour unrest, government had forced civil servants back to work with pay cuts, alienated, forgot its social-democratic roots, as well the “Risk” strategy involved more than supporting Mulroney, it involved the decision to shelve article one of the PQ program, which was referendum, this dropped the question, starved out the more doctrinaire elements of the party, e.g. Parizeau and Laurin
  • notwithstanding the decision not to run a federal wing, the Parti Nationaliste formed, performs abysmally in 1984 and disappears by 1988
  • Levesque resigns in 1985, succeeded by Johnson (conservative nationalist), the PQ fell to 23 seats nonetheless

The Canadian Crisis

  • set the stage for constitutional reconciliation, May 1986 Quebec Liberals listed their conditions for formally signing on, Meech Lake Accord 1987, appeared possibly to offer Canada Constitutional peace, impact more important than details
  • 1988 federal election unfolded with the belief that Meech was a done deal, permitted the Tories to increase their seat count, 63 seats, best showing ever of the Tories in Quebec, solidified their electoral coalition, but then a renewed dispute over Quebec’s language laws when Bourassa uses the Notwithstanding Clause after the Supreme Court rules some parts of 101 unconstitutional
  • Equality Party calls for official equality of French and English, just a flash
  • language controversy touched off the unravelling of Meech, absolute melodrama, return of Trudeau decrying the deal, deepening unity crisis, Manitoba and Newfoundland fail to ratify it and it dies, number of effects:
  • the NDP moves to expel its Quebec section from the party when it moves to endorse Quebec separation
  • for the federal Liberals, Meech was disruptive, Turner had supported it when announced, after Trudeau intervention he switches, but switches back and says he will support it with some changes, resigns in 1989, leadership convention unfolded, Chretien elected leader the day that Meech died, had served as Minister of Justice, very much a part of the struggle, initially Chretien was critical but he warmed up to Meech, his election led to two Quebec MPs leaving the party on account of his harsh approach to Quebec’s nationalist aspirations, these MPs left for the Bloc
  • the disintegration of the alliance was a result of the Bloc, Bouchard had been a close friend and supporter of Mulroney, but Quebec Tories left the party after Meech failed, they formed the PQ, July 1990, nationalists opting for a nationalist party, Bouchard emerges as leader, charisma, closer to the traditional nationalist elements in Quebec, call for greater devolution of powers to the parties
  • Bouchard elected to the Belanger-Campeau Commission to buy time, his participation afforded him further public exposure, sounding out the population on Quebec’s future, sovereignty running at an all-time high, the Meech failure and the rise of the BQ put pressure on Constitutional reconciliation
  • the Charlottetown Accord, 1992, more ambitious, to settle all Canadians’ constitutional demands, endorsed by Cons, Libs, and NDP, also had the support of the Quebec Liberals, submitted to a nationwide referendum, but rejected in certain regions, fell short of meeting Quebec’s demands 
  • Bourassa Liberals had also shelved a more autonomist approach being promoted by Jean Allaire, Allaire walks out, takes with him Mario Dumont (leader of the YLCQ), together they form the ADQ, Dumont takes over at age 23
  • 1993 election, BQ won nearly 50% of the popular vote, called into question the pan-Canadian claims of the federal Liberals (19 seats) and the PCs (1 seat, Charest)
  • a year later, the PQ return to power in Quebec, takes 77 seats to the 47 of the Liberals
  • 1995 referendum produced a virtual tie, 94% voter turnout, federalist won by less than 55 000 votes
  • the national question goes into overtime…

The West Wants In

Main Arguments:

  1. The Reform Party’s emergence in the late 1980s is consistent with a larger history of Western alienation that reflects an enduring suspicion of external control, a rejection of the status quo of Canada’s parliamentary system, and a thirst for a fundamental solution to redress the power imbalance between Central and Western Canada;
  2. The emergence of the Reform Party in the late 1980s arose from the failure of the two traditional parties to sufficiently respond to the specific concerns of Western Canada;
  3. The history of the Reform Party (and indeed its successors, the Canadian Alliance and the Conservative Party) reflects a tension between being a Western regional party, and the realities of obtaining the power to implement those measures meant to address Western concerns.
  • Western Alienation and Canadian Political Parties, Post 1945 to the 1970s
  • The Liberals and the West, or, “Let the Eastern Bastards Freeze in the Dark”
  • The PCs and the West
  • From Reform to the Conservative Party of Canada: Is the West In?

Western Alienation

  • Manning dropped the “social credit” dimension of the party and it became a rural-based conservative party
  • absolutely dominanted Alberta politics until the 1970s
  • concerned with the leftward drift at the federal level in the 1960s, Manning’s So-Creds took note
  • Social Credit Party won power in BC under Bennett, “Wacky Bennett”, he did not believe in social credit theory but used it to form a very conservative coalition to stave off the rise of the NDP
  • like its Alberta counterpart, the BC So-Creds asserted the provincial interest in its dealings with Ottawa, engaged in province-building, expansion of BC’s economic infrastructure
  • at the federal level, the national Social Credit party captured most of AB’s and some of BC’s seats, first under Blackmore, then under Low
  • it appeared at that point that Social Credit had what it took to become a major federal party, centred out of the West, championing Western interests, arguing that MPs being marginalized, excessive concentration of power in cabinet, party discipline
  • Diefenbaker election in 1957 changes everything, up until this point the PCs had been confined to the anglo-Ontarian business community, able to successfully harness discontent, he gave PCs a major Western rural base that he was able to combine with the central Canadian party
  • Diefenbaker’s success came at the expense of the So-Creds, lost all its federal seats
  • in its wake Manning recruited Thompson to take over leadership of the party, difficult task of reviving it at the federal level, had some success in 1962, wins seats
  • however 26 of the 30 came from Quebec, the Creditistes, only four were Western seats, questioned identity as a Western party
  • Quebec wing and Western wing had a fallout, rise of two distinct regional movements at this time, strengthening Quebec nationalism vs. growing Western nationalism, an irreparable split 
  • Social Credit never recovers at the federal level, Thompson resigns in 1967, leaderless, the following year they were seatless
  • Prairie provinces had obtained control of their resources, royalty cheques come in, Manitoba gains from mining, hyrdo-electric and forestry; Alberta gains from oil; Sask from uranium and potash
  • in Alberta’s case, the political figure most identified with the economic rise was Peter Lougheed, enters politics in 1962 as a PC, goes on to lead the Alberta Tories, able to enunciate an effective criticism of Soc-Cred that remained safely right of centre, argued that AB far too dependent on oil and gas and agriculture, concern at the time was oil running out, he criticized Manning’s So-Creds for failing to recognize oil’s potential for massive economic development, manufacturing sector, could rival central Canada, establish itself
  • by 1970s, majority of Albertans living in the cities, Pratt/Richards have interpreted the Lougheed Tories as the manifestation of a new rise of businesspeople in AB
  • parallels between QC and AB: using the state to further the social and economic interests of the middle class, moreover AB’s Quiet Revolution began in 1971 when the Tories win 2/3rd of the seats, still there now
  • growing expertise in bureaucracy, expansion, part of the challenge to Central Canada
  • beginning to draw in rural Albertans as well, Lougheed argues he needs a strong mandate from Albertans in order to challenge Ottawa, an uncaring domineering federal government led by Trudeau

The Liberals and the West

  • Liberal Party in decline throughout the St-Laurent era in the West
  • culminated with the Diefenbaker election with the Libs did not win a seat west of ON
  • Liberals centered chiefly out of Central’s cities
  • the most longstanding and significant dispute arose out of the question of oil, an oil crisis erupts in the 1970s, gas prices skyrocketing, Trudeau’s Liberals wanted to use AB’s oil to provide a steady supply and price to Canada by expanding the pipelines eastward to Central Canada, new incentives to explore the development and discovery of oil, establishment of Petro Canada 
  • “Pierre E. Trudeau Rips Off Canada”
  • just another example of CC arrogance, the forced sale of AB’s non-renewable resources at prices well below the global market prices, AB government doubles its royalty rate to make up for the fact that Ottawa keeping the resource at a lower price, increased tax helped to get the money back
  • Heritage Trust Fund: 1/3rd of all of AB’s oil resource funds to fund development, diversification, long-term way by which AB could achieve greater economic power within Canada
  • recently used this to pay off its provincial debt
  • Liberals induced Jack Horner, a Tory backbencher, to cross the floor, parachuted into the cabinet, a desperate attempt to establish a toe-hole in AB, but it was self-defeating, Horner loses the 1979 election, crass political opportunism, only win 3/77 Western seats
  • 1980 Trudeau denounces “the Clark government’s rather cowardly, soft approach to dealing with the West” and argues that the Libs would provide cheaper gasoline (to CC), i.e. would continue the 1973 policy, popular in CC, unpopular in WC, and fall to 2 seats (and even those were in Manitoba)
  • notwithstanding, Trudeau’s win a majority government (ON and QC), increases the sense of Western Canada, voting en bloc, still faced with a majority Liberal government, the system is not responding to the West, it is a tool of CC
  • Oct 1980: after oil prices again spike, Libs move unilaterally in enacting the NEP (National Energy Policy) meant to achieve self-sufficiency in Canadian petroleum, grants to encourage oil drilling in the Arctic, new taxes, expansion of Petro Canada, Western oil maintained at a price far below international prices
  • this does reduce dependency, foreign influence, but it strengthens Western alientaiton, stifles foreign investment in AB, especially when in 1982 oil prices begin to collapse, the moment when the NEP is coming into its own, AB’s best opportunity for economic development had passed, they had missed the boat
  • more broadly, NEP viewed by the West as an attempt to take control of provincial resources, the product of a political system designed to serve CS and marginalize WS

The PCs

  • Mulroney’s victory seemed to vindicate the strategy of working with one of the established parties
  • West seemed to have gained influence in Ottawa, held key cabinet positions, the NEP repealed
  • but the vindication of this co-operation strategy was short-lived, West had high expectations, Mulroney did not deliver
  • new protest movement
  • the fighter jet contract, Bristol Aerospace of Winnipeg lost despite being cheaper and superior to a Montreal company, CC interests trump WC interests, the CF18 scandal


  • roots in Western Canadian business elite
  • talk in Calgary and Edmonton of the need for a new party, especially among business executives, upset that the Mulroney government had not moved fast enough to repeal the oil and gas tax
  • attracted to Ernest Manning’s son Preston, who argued that the time was right to launch a new protest party
  • Van, Cal, Ed host the Western Assembly on Canada’s Economic and Political Future which lays the groundwork for a new protest party
  • Reform Party: “The West Wants In!” 1987
  • in addition to its neo-conservative policies and its populist tendencies it proposed a Triple E (equal, effective, elected) Senate, all of these aimed to reduce the power of the PM and lessen CC’s political influence, more ambitiously, to rebalance the division of power in the federation
  • no Reform candidates elected in 1988, but that had more to do with the strong support for Free Trade, to prevent Ottawa from imposing a new National Energy Program
  • in the wake of 88, Western alienation grew, along with the popularity of the Reform Party, it wins a bi-election and a Senate election in AB (Senator Stan the People’s Man)
  • GST enacted, first sales tax in AB, fury
  • Reform opposed Meech, an elite-driven CC process, called for equality between the provinces, no special status, gave the Reform a national pulpit, support increased when it opposed Charlottetown, going to result in a constitution that enshired CC domination
  • the Alberta Tories led by Getty 
  • Kim Campbell elected Tory leader, part of growing concern to their declining popularity in the West, but too little too late
  • 52/87 seats go Reform in 1993, Manning hoped that Reform would become national anchored out of the West, internal party referendum endorsed idea of running national, changed its slogan, but still its fundamental aim
  • influenced Liberal Party, Chrétien shifted rightward
  • but Eastern voters were alienated, perceived it as a Western party, extremist, only one seat elected east of Manitoba (Barrie!)
  • 1997 election: Reform won 1/5th of Ontario votes, widespread, this support did not translate into any seats; but won 8 more seats in the West and became the Official Opposition
  • trend was to see it as a Western party
  • Manning initiated the “United Alternative Movement” to unite the right, another bid of the West to obtain power, the attempt to break free of the Western confines of the Reform Party, downplay the exclusively Western agenda stigma
  • e.g. dropped demands for a Triple-E Senate and requested an elected Senate; toned down the references to Western alienation, on the backburner
  • ¼ of the Reform Party caucus opposed the UAM for fear that Western interests would become submerged like in all national parties and the West would not be “in”
  • a majority of the Western delegates to the UA Convention in 1999 endorsed and founded the party actually opposed the new party, but Ontario delegates swung it, result was the Alliance
  • most visible sign that the Canadian Alliance was moving away from the Western alienation stance was that Manning lost the leadership, he was identified with the idea, not popular amongst the corporate Canadian elite in central Canadian, felt uneasy about him, Alliance elected someone who was (initially) much more popular in the centre – Stockwell Day
  • 2000 election: Alliance gets 4.5% more of the popular vote more than the Reform ever had, and 66 seats
  • still a Western party in practice: only won 2 seats east of Manitoba, these were in Ontario
  • most of the committed party activists were Western Canadians
  • only with the 2003 merge with the PCs, the election of Stephen Harper (transplanted from ON to AB) that the West was able to bring itself to the Government side of the House
  • return to the Lougheed strategy, the idea that the West would see its interests realized and defended by participating in a pan-Canadian party as opposed to a regional protest party
  • since the 2006 election, AB has been hard-hit: the phasing out of capital cost allowance, the inclusion of resource revenues in the equalization process, etc. 
  • people have begun talking about a new Western regional protest party, West remains out
  • the combined population of AB, BC now has surpassed that of QC, the rate of population growth (fuelled by the tar sands) is outpacing that of growth in the rest of Canada, growing economic clout, Canada’s political and economic centre of gravity may be gravitating Westward to Calgary and Edmonton
  • suggests that the West is going to have more seats in the House, the West in the future may go with the protest party or the pan-Canadian party, but it is going to be “in”, seeing its agenda realized

One Party Rule or Perpetual Instability?

Main Arguments:

  1. The 1993 federal election constituted a political earthquake in Canadian party politics. The effects of globalization, combined with Canada’s cleavages, resulted in a regionalization and breakdown of the mid-20th century party system;
  2. The federal politics of the 1990s were an exaggerated version of earlier examples in which Ontario political forces fought off challenges from Quebec and/or the West;
  3. The regionalization of Canadian party politics and decline of pan-Canadian parties led initially to a situation in which one party was dominant, but since 2004 has resulted in a situation of perpetual instability in the form of minority governments.
  • 1993: Political Earthquake
  • Overtime: The Quebec Question and Party Politics
  • Uniting the Right
  • Decline of the Liberals?

Political Earthquake

  • a breakdown, a watershed, reflecting Canada’s internal divisions, each region relating to national politics in its own way, a five-way split
  • set the pattern for Canadian politics to the millennium
  • 1992: Charlottetown Accord rejected despite being endorsed by the three main parties, a victory for the Bloc and Reform
  • Canadian electorate angry and cynical in 1993
  • unpopular NDP governments in ON, SK, saw its national seat count drop, and lost their claims to Official Party Status, yet not the biggest losers
  • Tories ruling coalition had collapsed, rise of Reform and Bloc reflect this
  • massive recession, global in scope, had hit the manufacturing sector in ON especially hard
  • by the time Mulroney resigned, the PCs had an approval rating in the low teens
  • Campbell’s replacement was to remove the stigma, the thought that they would be able to hang onto power, Tories build on the image of Campbell, don’t try to run on their record or a new platform, focus on the party leader as the result of politics in the television age, but Campbell turned out to have a rather disastrous campaign, the first day she was a little too honest and said that really, Canadians were going to have to make do with high unemployment until the end of the century, and said that the campaign was not the time to discuss social security reform, and the TV ads of Chrétien’s lip paralysis were very unpopular, reduced to two seats, caucus able to meet in a phone booth
  • Reform and Bloc were big winners, had harnessed the regional anger of their areas
  • Bloc had only run candidates in Quebec and yet won the second largest number of seats, forced to serve as the Official Opposition
  • Liberals were the biggest winners, after a decade in the political wilderness, after the 1984 defeat there had been an internal battle between Turner and Chrétien, in 1986 the Chrétien camp spearheaded an effort to oust Turner, unsuccessful
  • Turner redeemed himself somewhat in 1988, from 40 to 83 seats, but this achievement was deceptive, still the second-lowest result after the very lowest result in 1984, seals Turner’s fate, he had lost Quebec, failed to restore Liberal fortunes in the West, his anti-Free Trade stance had alienated corporate Canada from the party, further divisions between the left and right within the party, demoralized party, Chrétien wins the leadership in 1990
  • Chrétien is spooked by the Constitutional crisis, not very effective in responding to the Oca Crisis, did not have a coherent stance on the Gulf Crisis in 1990-1, shaky years, but he does succeed in reorganizing the party
  • a policy conference, thinker’s conference, 1991, Aylmer Conference, new platform for the Liberals, later showcased in the Red Book, moves the Liberals a fraction to the right of the centre, embraced globalization, argued that an activist government was still necessary, but ultimately reject the welfare statism and economic nationalism
  • 1993: get seats in every region of the country, but due less to the platform, leadership, more to the fact that their opponents were weak, division of the right, permitted the Liberals to come up through the middle, Liberals had a majority, confident that their opponents had been dealt crippling blows, confident that the regional parties would not make bids for office, set for a long run in power
  • bulk of Bloc’s attention went to Quebec’s interests, Reform party in growing pains, a power struggle within between Manning and rising star Harper who leaves in 1997 to head up the National Citizen’s Coalition, a special interest group


  • 1995 Quebec Referendum
  • sense of crisis over Canada’s future
  • McKay’s article deals with the kind of literature being produced at the time, sense of pessimism, look at the footnotes, scathing
  • disarray in the ranks of the Quebec nationalist movement, Parizeau blaming the defeat of the “yes” side on the ethnic vote and lack of money, resigns PQ leadership, sets up a game of political musical chairs
  • Bouchard to take over leadership of the PQ (from Ottawa to Quebec City), charismatic, he was brought in to take over leadership of the “yes” campaign, principal spokesperson, took over even before Parizeau resigned
  • prompts the Quebec Liberals to draft Jean Charest, star federalist campaigner, from Ottawa Tories to replace Daniel Johnson in Quebec City
  • 1998: Charest Liberals won the greatest share of the popular vote, but trailed the PQ considerably in terms of seats, Libs had 48 while PQ had 76, popular vote count reflected that Quebec was seriously divided over the question of its future and the ADQ double its share of the popular vote
  • in Ottawa, Bouchard’s departure seemed to indicate a decline in Bloc fortunes, Gauthier succeeds him, followed a year later by Duceppe, who wins the leadership after a very acrimonious convention, divided by left and right wings, contributed to the impression that Duceppe was a weak leader without a hold on his party
  • declining popularity of the Bouchard government, neo-conservative, affects the Bloc
  • encourages the Chrétien government to call an early election, make gains in Quebec, only 3 ½ years into its mandate, Liberals pick up 7 seats, the PCs had the best relative gains moving from 1 to 5

Uniting the Right

  • another factor in the early election was the fact that the right was till divided, the Manning father/son had proposed a merger between the right-wingers, the So-Creds, and blue Liberals, a re-alignment, written in 1967
  • took a long time to be realized: PCs not willing to give up the ghost, anointed Charest as their leader, wanted to revive party fortunes, whipped out party debt, they were much better at tapping into corporate Canada resources than the Reform, but awkwardly ideological, between the Reform and Liberals, did not have a distinctive support base, no electoral machine to deliver support (had collapsed in the 1993 campaign)
  • 1997: Tories regain official party status, however they continue to trail Reform in popular support, PC support too thinly distributed, a few pockets of PCs in each constituency
  • Tories obliterated in Western Canada, barely holding on in Central Canada, most support in Atlantic Canada
  • Reform a party of the West
  • both parties take about 20% of the popular vote, allows Liberals to come up the middle, sweep ON in 1997, conditions for perpetual dominance
  • to form a moderate right of centre party
  • Manning has party endorse its own demise in early 1999, UA Convention, idea endorsed, in 2000, new party officially founded with the name Canadian Conservative Reform Alliance(Party) CRAP, becomes the Canadian Alliance
  • although Reform joined the Alliance, Clark’s Tories refused, ran a full slate of candidates
  • enabled Liberals a third majority
  • Day’s disastrous leadership, members leave, form new party with a loose coalition with the Tories
  • looks like the Tories will unite the right, pick up the pieces
  • 2001 Convention: Harper elected leader, this changes the political equation, he revives Alliance fortunes, Democratic Representatives rejoin party, Clark resigns in 2003, succeeded by McKay
  • McKay had, in the course of the spring 2003 convention, promised that he would not pursue a merger, in the fall he reversed his decision and the merger happened by the end of 2003
  • March 2004: Harper elected leader of the CP
  • emergence of the CP as the pan-Canada party

Decline of the Liberals?

  • Liberals have been in decline in the West since the St-Laurent period, especially following the Diefenbaker victories, in the subsequent Trudeau years the Conservatives were getting a relative majority outside of Quebec in the 1970s and 80s, support for the Liberals in Quebec began to disintegrate after the 1982 Constitution, the rise of the Bloc, Liberals unable to recover, in 1988, Liberals lost seats and their share of the popular vote in Quebec, more than half of its caucus coming from ON, in 1993 Liberals won only 18 seats in QC, Chretien forms a majority government without a majority of Quebec seats, 55% of the caucus from ON, having won 101 of 103 seats, in 1997 the regional decline is confirmed, although they had seats in all provinces except NS, only had a majority in NF, PEI, and ON, an Ontario party
  • revived a bit in 2000 election, but deceiving results, swept because of divided right
  • won 36 seats in Quebec, just a couple shy of the Bloc, and they outpolled the Bloc by 5% in the popular vote for the first time
  • appeared to vindicate the harder line the Chretien Liberals were taking after the 1995 referendum, were pushed by the Reform Party, which advocated a more assertive approach towards Quebec
  • a reference to the Supreme Court regarding the potential succession of Quebec, what law would rule, what would be the procedure, culminated in the 2000 Clarity Act sponsored by Dion, stated that Ottawa would not negotiate separation unless the referendum question was clear and had received a clear majority
  • speculation that the Clarity Act would wipe out Liberal support in Quebec, but by 2000, already problems within the party, namely the Sponsorship Scandal, Gomery revealed that Liberal strategy was designed to annihilate the Conservatives and unite federalists under the Liberal banner, make the Liberals synonymous with Canada
  • a blurring of the lines between what constituted a national interest and what constituted a Liberal interest, increasingly perceived as one and the same within the party and the bureaucracy
  • when the Sponsorship Scandal blew up, it was a divide between Chretien and Martin
  • Martin supporters increasingly annoyed by Chretien’s dominance, three elections, after the third majority the Martin Liberals began to act, moved to take over the Liberal party from the grassroots up, quite successful, by 2002 a power struggle in the open, Martin fired/resigned from Minister of Finance
  • Chretien feels the party being taken over, announces resignation 
  • despite being initially seen as a break from the past, Auditor General releases report on the Sponsorship Scandal, Martin’s Liberals seize the opportunity to bury Chretien with it, but voters don’t distinguish, the same party regardless of leadership
  • in 2004 election, reduced to a minority government against the newly united right
  • in 2006, Conservatives come to office
  • a revival of the Bloc’s fortunes in the wake of “dirty politics” in referendum and AdScam, support rises back to Bloc’s 1993 levels, win 54 seats in 2004, but down a bit in 2006, result is parliamentary instability
  • no one party has been capable of achieving a majority, as in the 1960s
  • remains to be seen if Conservatives can win a majority or whether the regionalized politics and the instability of minority governments will continue

Voter Alienation and Alternatives to Parties

  • Declining voter participation
  • Question of government legitimacy arises
  • Reaction is adaptation to voter alienation
  • Despite some predictions to the contrary, the death of Canadian political parties has been greatly exaggerated

Growth of Cynicism

  • e.g. failure of Charlottetown
  • understood as a rejection by voters of the elite-dominated political brokerage politics
  • the alienation manifested in two huge specs: the decline in the number of Canadians turning out to vote (highest in Diefenbaker era, rate has been on a downward trend since, from 75% to 70% in 1993 to 60% in 2004 and the accentuation of voter volatility, seen in Mulroney’s landslide and the Chretien landslide, breakdown of party loyalties
  • reflected in the growing number of new parties
  • has created a vicious cycle, increased prominence of short-term policy making, parties have to capture disloyal voters
  • has led to scapegoating, criticizing, attacking opponents
  • has only further fuelled alienation
  • the changing electorate, the Baby Boomers, anti-establishment atmosphere, led to a decline in voter attachment to the political status quo, the traditional parties
  • growing disdain against patronage, the more they practice it the less esteem they are held in, yet it’s a traditional function
  • television clips, House of Commons, emphasis on the leader, popularity quickly gives rise to familiarity and then contempt, increasing cynicism about television politics, contempt of photo-ops, e.g. Stockwell Day and the jet ski
  • has led to parties relying less on the grassroots, turn to professionals who strategize, no longer community organizations
  • television has multiplied the impact of scandal, makes for great news, but government is remote, impregnable in perception, party not an intermediary to the system, out of touch with constituents
  • the acceleration of globalization, voting rates highest in 1950s when Canada’s project of national rule was at its height, the Keynesian era, government intervention, economic and environmental problems are international in scope, no one government dominates, the neo-conservative approach to government that reduces the scope of the welfare state, they themselves don’t seem to have the answer, aren’t taking part, people themselves are increasingly mobile, less tied to the community or the party
  • the impact of Canada’s electoral system, the first-past-the-post system works best in a two party situation because the winning party is guaranteed at least 50% of the vote, but in a multi-party democracy they only need a plurality, e.g. Rae’s government with 38% of votes got a majority, votes not translating, fewer voters, fewer votes counting… question of legitimacy!

Party Responses

  • one response was the release of campaign books, Chretien’s Red Book, Harris’ Common Sense Revolution
  • to appear more accountable, tangible
  • another one is the growth of populist discourse, around free trade, constitutional reform, evidence of a rejection of brokerage politics, increasingly in the early 1990s voters were demanding to be consulted directed, rejecting parties as a gateway, e.g. Charlottetown
  • after their 1993 wipeout, the Tories adopted a new party constitution in 1995, founded upon the pre-eminence of the membership and the local offices, pushing power down, e.g. one member one vote system for electing leader
  • Reform Party able to generate and ride the populist wave, portrayed itself as a genuine grassroots party championing grassroots democracy, direct democratic measures, referendums, recalls, proportional representation, reduction in party discipline called for, they don’t have a party whip in their caucus and instead adopt a caucus co-ordinator, vow that they will be dignified in parliament, Manning sits in the middle not in the front, spend money on television town hall meetings to sound out Canadians, a symbolic message that Parliament isn’t the most important locus
  • not without repercussions: NDP government of Clark subjected to repeated attempts to be recalled, towards the late 1990s the “Total Recall Campaign” which targeted every member of the BC legislature to oust Clark government
  • in Ottawa, Reform soon changes, moves towards opposition party tactics, Manning moves to the front bench, adversarial logic, cat-calling, desk-banging, Manning has dental surgery and laser eye surgery, from a folksy image to a leader, maintaining as strict a party discipline as anyone
  • Mercer’s move to change Stockwell’s first name to Doris
  • Chretien Liberals introduced wide-ranging changes on elections, the limit on how much parties and candidates could receive was reduced, contributions from unions and corporations were banned, the new law provided for taxpayer funding of the parties (had to get it from somewhere and couldn’t count on voluntary contributions!), this suggests that political parties which really emerged as private organizations are shirting further into the public sphere, increasingly intertwined with the state apparatus, a measure meant to reduce voter alienation has the affect of increasing the state’s role in the process
  • alienation doesn’t necessary mean a decline in participation, proliferation of special interest groups, promoted by the funding of the Trudeau Liberals to promote participatory democracy, allegiance not to parties but to interest groups, even the corporate sector began spending more money on trade groups and lobbying than on contributing to the parties
  • e.g. successful effort of Doris Anderson “Canadian Advisory Council on the Status of Women” and the “National Action Committee on the Status of Women” to ensure that gender equality entrenched in the Charter
  • NAC’s relations with the three main parties began to erode, adopted an apartisan approach, an extra parliamentary opposition, consistent with the membership’s disdain for political parties, easier to attack it than work within it
  • the challenges of reconcile, especially NDP, e.g. unionized loggers and environmentalists
  • Smith’s article: the Courts have been used, even before the Charter, as a means of advancing claims, Liberals able to use Court for gay rights
  • voter alienation has led paradoxically to the proliferation of parties, from just four in 1972 to 14 in 1983 (some just mockeries)
  • individual citizens turning to social movements, governments turning to non-party organizations like think tanks and interest groups for input
  • an eventual death?
  • parties transforming themselves to guarantee their continued relevance, how they adopt and respond to regionalism and globalization, linguistic and cultural cleavages, the social and economic challenges of an increasingly aging population, alienation

StoryWorthy by Matthew Dicks | A Quick Summary

Rule #1: The Main Character Must Undergo Change

  • Your first idea for how 2 fix a writers block is rarely ever the best. Think about how you can engineer your story to maximize the fun…
  • You have to find the piece of the story that we can connect with. Drinking stories and vacation stories are not good because they are a series of ANDs…I did this and this….us But & Therefore, Cause/Effect.
  • Your story should be tell-able at a dinner party: KISS = keep it simple, smartie-pants.
  • You should practice telling your canned stories at said dinner party. But never in front of a mirror that’s not how you’ll tell it in the wild.

Rule #2: Harvest the Mundane & Audiences will Connect

  • People want to engage by seeing themselves in that story. Just say no to jumping out of an airplane, epic adventure and say yes to arguing with your spouse about the dishwasher! Make your story little.
  • Create a spreadsheet called the Homework4Life™: column 1: date, column 2: write a snippet about the most eventful part of your day.
  • Write down snippets from your live memories when they pop into your mind so that you can harvest later.
  • Self-discovery requires the reflection habit to form which means taking 15 minutes a day. It takes time to hone in on your stories. §Harvest in your daily life and you will find other memories.

Rule #3: Homework4Life™ Is Better Than Anything

  • Use stream of consciousness to populate your Homework4Life™ spreadsheet on a daily.
  • Forget what the education system has taught you: ie. to have a main message (thesis) and your arguments to back that thesis. This approach is deeply alienating. §Use a pen/keyboard or speech-to-text into your phone so that there are no pauses.
  • If you have pauses/writers block start listing colours until a new memory is triggered based on association. §Storytellers needs to selfishly guard their time: that means early morning or a locked door.

Rule #4: Unearth Stories with First / Last / Best / Worst

  • Create a spreadsheet called the First/Last/Best/Worst™:
  • Scan your memories based on these 4 questions.
  • What was your first ____? What was your last ______? §What was you best ____? What was your worst _____?

Rule #5: Five Second Moment i.e. Jurassic Park is not a dinosaur movie

  • The reason you put pen to paper is you had a 5 second moment of profound realization and you think others should know about it.
  • Profound realization = a moment that changes your life fundamentally
  • “I love this woman but she wants kids. I hate kids. Then after saving two kids I realize I do like kids. And my sweetheart and I ride into the sunset.” – Dr. Grant from Jurassic Park §Realization should be the polar opposite of the start of the story.

Rule #6: Find Your Beginning (the Opposite of the End)

  • Your story should end with the five second moment of realization.
  • Your beginning should start at the extreme opposite: start afraid end fearless, start happy end sad, start uncertain end confident, start hopeful end not, start angry end grateful. The opposite can be good or bad, just make sure it is the opposite of the end to maximize the story.
  • Every good film starts with the main character moving to the opposite by the end of the story. In other words, the main character has an arch.

Rule #7: Create High Stakes, Why is the Best Question

  • Why is the best question you can get your audience to ask (engage!)
  • A) The Elephant: An elephant is the thing that everyone in the room can see: it is the need the want, the problem, the peril the mystery. It signifies where the story is headed.
  • Elephants can change colour: it can flip to create more surprise.
  • B) Backpacks: increase the stakes by increasing audience anticipation of what is next because you laid out the plan and now we are watching with you as you execute. Ocean’s 11 has a plan that ratchets up.
  • C) Breadcrumbs: leave little hints for future events but only enough to keep the audience guessing (engage). Find a breadcrumb that maximizes the number of guesses the audience can make. Of course, the completely unexpected is the most effective story.
  • D) Hourglasses: take the audience to the brink of the big reveal but then provide insane detail. What is the story teller gonna do next? Please get to the punch line! This is hurting my brain!
  • E) Crystal balls: audiences want to run ahead often. Here the storyteller creates a false prediction of what is going to happen next. We are programmed prediction machines. Get your audience to engage your story. The storyteller’s prediction is strategic.

Rule #8: Don’t Be A Dufus (public speaking rules)

  • Do not praise yourself: no one wants this amazing AND awesome person.
  • Be self deprecating: no one likes a know it all.
  • Don’t ask rhetorical questions: it derails the cinema of the mind.
  • Offer one granular bit of unique value, one 5 second moment. A small memorable and useful idea for the graduates: if you’re valedictorians.
  • Don’t cater any part of your speech to the parents of the graduates.
  • Make your audience laugh: the comic triple, sarcasm, irony, intentionally miss.
  • Do not talk about the weather if it’s hot everyone knows it…
  • Do not be formal in your speech be casual like you’re speaking to a friend.
  • Be excited, hopeful and enthusiastic: the audience wants a Yes, Ladder.
  • Don’t describe the world the graduates will be entering because you actually don’t know the world, you only have your perspective on the world even with modest data.
  • Don’t define terms based on the Webster dictionary: it’s just lame.
  • Don’t use a quote that you’ve heard someone use in a previous commencement address. You’re goal is to provide new insight that’s why you’re getting this degree.
  • End your speech in less than the allotted time: brevity is the soul of wit, “If I had more time, I would have written a shorter letter.” – Blaise Pascal

Rule #9: Permissible Lying in Storytelling from Your Life

  • Lie 1# Omissions: if there was a third person who is not relevant simply don’t distract the reader with their presence since that’s distracting.
  • Lie 2# Compression: if it took 5 days then compress into in an afternoon if credible. Every film compresses time into a 24 hour story almost always. It creates pace & urgency.

Rule #10 Create the Cinema of the Mind, Visuals

  • Storytelling must put the audience in a location that they can imagine on their own. Every moment must be situated in a physical location the audience can create in their own mind thus engaging them fully.
  • Never open a story with a philosophical point, a thesis.
  • If you need to explain something philosophical, then the audience in the classroom w your teach or judge’s chambers with the lawyers or the stock exchange or where ever that idea can be credibly expected to be discussed. §

Rule #11: Use “But” and “Therefore”

  • Cause & Effect causes the human brain to release dopamine. §DO NOT CONNECT sentences with the word AND. AND kills.
  • “But” and “Therefore” are the ligaments of storytelling. §“But” = although, however, nevertheless, still, though, yet, on the other hand.
  • “Therefore” = so, then, thus, consequently, for, and so, hence, since, to that end, on account of, on the ground.
  • The story is a chain of cause and effect events…destination is the five second moment of realization.

Rule #12: Surprises Elicit Emotional Responses

  • Paint a rosie picture of scenic day and then suddenly WAM!
  • Never present the thesis statement before your surprise.
  • Never say what this story is actually about, let the audience ride.
  • Always hide critical information in clutter or innocuous details.
  • A laugh line is a good spot to hide a key piece of information.
  • Save the last big laugh for the end. Do not blow the joke early.
  • The Baby Blender rule is that two things that don’t go together are smashed together, typically humour ensues.

Rule #13: The Present Tense Is King

  • Part of the Cinema of the Mind is to make it happen right now.
  • Using the present tense always is very effective for keeping readers in the moment itself. Get your audience to time travel with you to now, this story is happening. Let the audience create the vision of the events as they unfold.

Rule #14: A Hero Must Start the Story the Opposite

  • Failure is fare more engaging than success from the start.
  • Marginalize your accomplishments: know you aren’t perfect. Be the underdog in the story. We love underdogs!
  • Malign yourself: tell the story of a small success.

Rule #15: When Performing

  • Get your audience to laugh in the first 30 seconds of your story.

Don’t memorize every word of your speech. Instead:

  • Always start strong: the first few sentences should be memorized.
  • Always end strong: the last few sentences should be memorized.
  • Know the scenes of your story: MAXIMUM 7 Scenes to remember, memorize the colour which indicates mood of the scene.
  • Make eye contact with three people in the audience. One on the left, one on the right and one person in the centre to move back and forth between.
  • Control your emotions as the moment of intense emotion arrived, change the perspective from your vantage point to 3rd person so that you don’t cry on stage.

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