Debt gets such a bad rap.
Parents warn their children about it. Newscasters frown significantly when they say the word on the evening news. The quotation books are fully of snappy one-liners, coined by everyone from Euripides to Robert Service.
No one likes debt.
Except when they need to borrow some money, of course. And even then, they keep it quiet. You don’t hear people saying things like “check out my new truck ... I’ll be paying three points over prime for five years!” Nor do you walk into someone’s kitchen and say “nice new counters ... you must be so glad the bank lent you the money for the renovations!”
In fact, our whole country has a dirty debt secret. It’s so embarrassing, it’s hardly ever mentioned in the history books. And we certainly don’t bring it up when our friends from the Eurozone are around.
The secret is that, while debt threatens to destroy European integration, the Canadian federation was built on bad debt.
Prince Edward Island hosted the conference that led to Confederation, then embarrassingly refused to join the new country. They were back six years later, however, after a loss-making railway project threatened to put the colony’s finances deep into the red. Canada promised to pay P.E.I.‘s debt, and threw in more money to buy land from absentee landlords and keep a ferry running to the mainland.
The ferry, by the way, ran for more than a century. Then it was replaced by a big bridge that provoked jokes, in what passes for humour in constitutional law classes, that P.E.I.‘s membership in Canada was no longer valid.
As for British Columbia, debt problems forced the Colony of Vancouver Island to merge with its mainland rival in 1866. Five years later, Canada promised to assume B.C.‘s debt and build a railway to induce the colony to join Confederation.
Debt also played a role in Newfoundland’s entry into Canada. Prior to 1933, Newfoundland was a separate dominion like Canada and New Zealand. Newfoundland’s debt more than doubled between 1920 and 1933 as the government went on a spending spree. During the Great Depression, a shocking 65 per cent of Newfoundland government revenues went just to pay the interest.
This episode earned Newfoundland its own section in This Time Is Different, economist Kenneth Rogoff’s famous book on the financial crises throughout history.
When Newfoundland joined Canada in 1949, the federal government assumed responsibility for 90 per cent of Newfoundland’s debt.
The Yukon didn’t manage to run up a big debt prior to being acquired by Canada; the Yukon government didn’t even exist yet. Nor did the Hudson’s Bay Company accept Canadian promissory notes for the purchase of Rupert’s Land and the North-Western Territory. The 1870 order-in-council required Sir John A. to pay £300,000 in cold, hard cash into the Bay’s account at the Bank of England.
So why is debt potentially causing Europe to fragment, while it seems to have been the glue that put Canada together?
One thing is that not every colony had a fiscal crisis at the same time. While crisis has struck Ireland, Portugal, Spain, Greece nearly simultaneously, central Canada was usually doing relatively well when the various British colonies ran into trouble. Sir John A. always seems to have been in a nation-building mood, and didn’t mind writing cheques the way German Chancellor Angela Merkel does.
Banks are another critical difference. Banks are much bigger relative to governments now than they were a hundred years ago, and colonial banks weren’t as tightly linked to their governments as European banks are.
One reason European governments are in debt is because they had to bail out their banks. And their banks are sick because they hold their capital in local government bonds which seem to get downgraded every time you open a newspaper.
Things might have been different if the debts of Newfoundland and British Columbia had been swollen by huge bank bailouts. Or if big banks in Victoria and St. John’s were insolvent because they were stuffed with dodgy colonial bonds, and were threatening to take down big chunks of the colonial economy with them.
Should we go so far as to suggest European ministers of finance should bone up on their Canadian history? Probably not, although Angela Merkel would undoubtedly be interested to know what tough bargains Sir John A. drove as he bailed out the other colonies. He spent freely on debt guarantees and railway promises, but the recipients ended up as provinces and not independent dominions.
We can also wonder what it all means for the Yukon’s eventual provincehood. We don’t have anywhere near enough debt to become a province in the style of B.C., P.E.I. or Newfoundland. But from what we learn from debacles involving asset-backed commercial paper and the recent hospital financing, the Yukon government is doing its best to fix that.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels.