Sunday, July 1, 2012

Canadian Confederation: An Exercise in Centralization

"British businessmen played a crucial role in the achievement of Canadian Confederation. Without the support of a small but influential group of investors, Confederation would not have occurred in 1867, if at all." - Andrew Smith, British Businessmen and Canadian Confederation

The early 1860's was a terrible time to be investing in British North America. The dictatorship of Abraham Lincoln and the War Between the States affected the railway sector on both sides of the border. In the Province of Canada, British bankers Thomas Baring and George Glyn had invested heavily into the Grand Trunk railroad. It was their hope to connect the railroad with the Halifax-Quebec line and eventually extend the railway West, to the Pacific. But even the simple connection between Montreal and the south shoreline of the St. Lawrence was proving to be a hassle. For starters, the railway was far from being profitable - even with a hefty dose of state subsidies.

The drastic reduction of crossborder trade that began in 1860 caused much trouble for the railway. Shippers were hesitant to use the Grand Trunk for fear that if the railway were seized by creditors, their property would be left stranded, or worse, confiscated. As the Grand Trunk started to miss its interest payments, the prospect of bankruptcy worsened the situation. Baring and Glyn presented the Canadian cabinet with an ultimatum - increase subsidies or all services will be suspended. The judges of Upper and Lower Canada called their bluff; the railway was a "public utility" and could not, legally, be shut down. Behind the scenes cabinet members George-√Čtienne Cartier and John Ross (who were financially tied to the railway) gave into Barings and Glyn's demand for more money. But as rapper Notorious B.I.G. would point out over one hundred years later, 'mo money mo problems'.

Thomas Baring was in a difficult position. His Baring Brothers bank was a private bank rather than a corporation whose shareholders could enjoy limited liability. Whereas corporate owners have the luxury of knowing that in the case of bankruptcy their private assets are off limits to creditors, Thomas Baring and George Glynn did not have this reassurance. Baring Brothers had suffered many losses prior to the eruption of the War Between the States. An iron mill in Weardale was a financial disaster, and loaning money to the Government of Mexico was proving to be a stupid mistake. The bank's capital fell from £1.4 million in 1859 to £627,000 in 1865.

In 1861 Baring and Glyn hired Edward Watkin, one of the leading railway executives in Britain, to solve the problems of the Grand Trunk. Yet it wasn't Watkin but Nova Scotian politician and journalist Joseph Howe that first suggested the creation of an organization to promote the interests of the British investors in North America. Howe wrote to Thomas Baring on December 31st 1861 stating that the he had come to the conclusion that the "position of the British capitalists who have placed their money in the Canadian Companies which do not pay... ought to have some Association that will form a Common centre for the collection and diffusion of information about the Colonies." This association would not consist of just "Grand Trunk people but combining all the British North American interests." Howe had "talked the matter over with Mr Watkins who agrees in the main with me. A few thousand expended in this way would be returned back hundreds of thousands." He ended with his letter by asking Baring to promote this idea and to "show this note to Mr Glyn, who I know slight."

The British North American Association was formed in January of 1862. The BNAA included many influential figures in British finance: Thomas Baring and George Carr Glyn (of course), Kirkman Daniel Hodgson - an MP, past Governor of the Bank of England and major investor in Grand Trunk securities, members of the International Financial Society as well as many others not directly connected to the Grand Trunk railway. The BNAA was praised in the British media on the grounds that it would solve the problems of the Grand Trunk and ultimately connect the colonial province of Canada to the ice-free port of Halifax, thereby bypassing the United States of America. The Herapath's Railway and Commercial Journal considered the Intercolonial railway as "vastly more important to this country" than "many a line in India now rapidly progressing" and decried the lack of capital the railway "deserved."

Immediately after its formation, the BNAA organized a campaign for the British Empire to financially support the Intercolonial railway. By March of 1862 the British government's Board of Trade had received an overwhelming amount of support for the initiative. But not everyone supported the idea of a colonial union with an Intercolonial railway. Many British manufacturers and classical liberals who denounced the Empire were hostile to the idea, as well as the Times that accused the plan as a bailout for the people responsible for "the calamitous failure of the Grand Trunk Railway of Canada." Despite these protests, the BNAA's campaign was successful.

The idea of a colonial union of the British North American colonies had been discussed for decades, but it wasn't until powerful interest groups - the BNAA and investors in the Grand Trunk - that the idea became a reality. The Intercolonial railway could have been built without a political unification but by July 1862 these two ideas had become infused. Constitutional reform could solve many the problems the investors had in dealing with the decentralized colonial governments. The BNAA had succeeded in convincing Britain’s Colonial Office in favouring a union of the British North American colonies; a policy the Office had opposed as little as three years earlier.

Edward Watkins, the man hired by Barings Brothers to fix the Grand Trunk situation, befriended the Duke of Newcastle, who was the Colonial Secretary. In July 1862 the Duke wrote a letter inviting the colonial governments to propose a federal constitution. He promised support and assistance from Britain. The conferences at Charlottetown and Quebec were the result of the Duke's letter. The Duke retired in 1864, but his successors continued his efforts to unite the British North American colonies.

British financiers supported Confederation because it would consolidate their interests upon the continent. But what about the "Fathers of Confederation" themselves?

Many of the "Fathers" were dependent on the continuing inflow of British capital. Confederation had virtually nothing to do with 'independence' as the British North American politicians didn't acquire any new powers at the expense of the British Empire. In addition, colonial citizens found themselves with less liberty following 1867 as many powers designated under provincial jurisdiction were reassigned to a centralized bureaucracy originating from a city chosen by the Crown. The government created by the Fathers was a government with unlimited authority over provincial jurisdiction, all matters not explicitly outlined in the Constitution and all forms of taxation and regulation. Simply, Confederation was an exercise in centralization.

The financial elite in Britain were pleased with the proposals coming out of Charlottetown and Quebec. For starters, the British North American colonies were to remain British. They agreed that liberty and democracy needed to be checked by a "stiff dose of aristocracy and monarchy." Most of the Fathers saw eye to eye with the British investors that the new federation required a strong central government with weak provinces; the political structure of the American Republic was discouraged.

It would be a mistake to assume that British investors had an active role in the meetings in Charlottetown and Quebec. British investors had a cozy relationship with the Colonial Office but they did not infiltrate the meetings to meet their end. For starters, they didn't need to. The Fathers of Confederation were already political allies with the bankers via their investments and relationship to the Empire.

George-√Čtienne Cartier started off as a rebel, but by the 1860's he was a well-paid solicitor of the Grand Trunk railway. John A. Macdonald was employed by the Trust and Loan Company of Upper Canada. Charles Tupper owned land near the projected route of the Intercolonial railway, which explains his vocal support for British financial assistance. George Brown had been a supporter of economic decolonization, but defected when the Province of Canada's securities took a beating in the British capital markets.

After 1867, and particularly in the 1870's, it would have been permissible to regard Confederation as a complete failure. The Grand Trunk was still unprofitable, British Columbia was threatening succession and Canadians were emigrating to the United States en masse. However, by the early 20th century it was clear that Confederation was successful for British investors.

Instead of defecting to Wall Street, London's Lombard Street was Canada's financial capital. The British North American Act had delegated power to Canada's federal government to regulate usury laws, thereby resolving the Trust and Loan Company's headache over local populist movements. Prior to Confederation, it was felt that the British North American colonies were becoming too democratic.

The Grand Trunk amalgamated with many railways in Southern Ontario until nearly all the network of railways were in the hands of a single firm. It wasn't until later that the BNAA's vision of a railway to the Pacific was achieved. This goal brought the railway to the edge of bankruptcy. The Grand Trunk was nationalized in 1923.

Smith, Andrew. British Businessmen and Canadian Confederation. Montreal & Kingston: McGill-Queen's University Press, 2008. Print.

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