01 February 2016

Newfoundland government finance, 1832 to 1949 #nlpoli

Before Newfoundlanders stopped governing themselves in the early winter of 1934, they’d run a sometimes arduous course.

Newfoundland gained a limited form of self-government in 1832 and in 1855 gained Responsible Government.  That gave control of  virtually everything except defence and foreign policy to a cabinet made up of members of the elected assembly and the appointed upper chamber of the legislature. 

By the 1880s,  the government wanted to expand the economy beyond the fishery.  They started a railway project to open up the interior of the island and the western coast, much the same way that the Americans and Canadians had used the latest technology – the railway – to expand to their west.

By the 1890s,  the government encountered its first serious financial problems. The British vetoed a trade agreement with the Americans in 1890.  The British governor was at odds with the cabinet in the early years of the decade over the country’s growing debt.  And in 1894,  the local banks collapsed, plunging the country as a whole into a financial crisis. 

The government met loan payments due on the first of January 1895 by suing a deposit the government bank had made with a n American bank.  But through 1895, the government struggled to find a way out of its problems.  Talks with the Canadian government on Confederation fell apart as the Canadians refused to accept responsibility for the whole of the Newfoundland debt. 

The Newfoundland delegation in the Canadian talks proposed that Canada would assume all Newfoundland's debts and liabilities, which amounted to $15.9 million.  In addition, Canada would make annual payments of $819,273 to the new province and take over services costing $827,000 as well as make a variety of other grants.

The Canadians offered to assume $10.4 million of the debts and other liabilities. Newfoundland would have to cover $5.5 million in debt.   The Canadians were also willing to make annual transfers of $465,000.   That fell far short of Newfoundland’s requirements.  An appeal to the British to help with the balance left to Newfoundland from the Canadian offer came to nothing.  The British felt the Canadians were driving too hard a bargain while the Canadians were unwilling to set a precedent by exceeding the financial terms offered to Prince Edward Island in 1874.

Sir Robert Bond was able to negotiate a loan from Canadian banks on his own account, secured with his personal assets. Ultimately, the government secured a “long-term loan and a short-term debenture in London. In return Newfoundland had to agree to several austerity measures including a reduction in public spending and attempting to pay off the public debt.”

A poor fishery in the latter part of the decade reduced government revenue and by the end of the decade the government entered a contract with the Reid family to operate the railway and dockyard for the sum of $1.0 million.  The contract was controversial, cost the Conservative government the election, but renegotiating the contract cost the government more money.

As David Facey-Crowther noted in his introduction to Owen Steele’s diary from the Great War, Newfoundland in 1914 was a place with limited means and large public debt. The government collected about $3.6 million each year and carried a public debt of $30 million.  In other words, within 20 years, the public debt had doubled.  Such was the tough financial straits for the government, as SRBP has noted before,  the government was forced as early as November 1914 to try and offload the cost of button and boot polish for soldiers onto the British government. 

By the end of the war, the public debt was $40 million and by the early 1930s, the debt was double that again.  The government’s annual income through the 1920s averaged about $9.0 million.  In 1931, the government could not borrow any more.  Interest on the public debt consumed almost two thirds of the government’s annual spending.  The Canadian government intervened with the Canadian banks and so the government was able to get through the first interest payment and, with a subsequent loan, the second one in 1931.

The price for Newfoundland was the appointment of two British financial advisors and a Canadian to assist with finding efficiencies in the delivery of utilities.  The Depression had shattered the value of newfoundland’s exports.  Poverty and unemployment were widespread and the government had no financial means to relieve public hardship.

The surrender of self-government came at the end of 1933, after a commission appointed by Newfoundland, Britain, and Canada recommended so.  They made the recommendation in no small part as a result of the submissions they received from Newfoundlanders themselves.  The suspension of democracy had widespread support in the country.

By the time the Newfoundland government convened a national convention on the country’s future,  some things had changed.  The war had shifted Newfoundland’s trade relations away from Britain and to Canada and the United States.  As in the Great War,  the local economy had prospered.  The government, however, still held a debt of almost $100 million.

Newfoundland wasn’t the only country in financial difficulty in the Great Depression.  Britain restructured part of its war debt in 1932, effectively making a form of default.  The British rowed with the Americans around the same time over the threat that the Weimar regime in Germany would default on its war reparations.  Other countries defaulted on public debt throughout the 1930s.

Newfoundland’s decision to surrender self-government was the result of a long history of financial difficulties, the relationship among Canada, Britain, and Newfoundland, and support for a surrender of self-government  among elites in Newfoundland itself.

In other circumstances,  Newfoundland may have taken a different course, but the immediate financial crisis caused by the Great Depression was extraordinarily severe:
Between 1928 and 1933 fish prices fell by 48 per cent and newsprint prices by 35 per cent. The value of total exports fell by 27 per cent over the same period, imports by 44 per cent. Government revenues, still largely derived from custom duties, declined by 11 per cent, though there were increasing demands for relief payments, occasioned by fisheries failures in 1930, 1931, and 1932. The cost of debt servicing was becoming unbearable.  [Hiller via Mel Baker]
The government in 1934 owed 10 times its annual income. Merely paying the interest on its debt took between 63% and 65% of its annual spending. By the early 2930s there was no sign that the government could turn its finances around on its own.

The Amulree commission final report averaged borrowing over the 1920s at $2 million a year on an average income from own sources of $9 million.  In practice, though, the borrowing  undertaken by the government was considerably larger at the beginning of the 20s and in the final two years before Newfoundland gave up self-government.

The Commission took office in the winter of 1934.  Fifteen years later,  Newfoundlanders regained self-government, this time within Confederation under the Terms of Union.  The $100 million that had finally broken the country disappeared, not because the Commission had wiped it out but because Canada agreed to take it on.  Newfoundland had, in effect, a clean slate on which to start again.


Coming:  Newfoundland and Labrador government finances, 1949 to 2015