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Canada (162,367)
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ADMS 1010 (82)
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Case 4.docx

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Department
Administrative Studies
Course Code
ADMS 1010
Professor
Alison Kemper

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CASE 4 ‘Irrational Exuberance ’: The Creation of the CNR ‘irrational exuberance,’ - warning that the market might be somewhat overvalued - consequences of irrational exuberance were being felt by some for the first time in 1917 Issues faced by Prime Minister Robert Borden - ‘the railway mess’ o three transcontinental railways had been built for a population of just over eight million, which resulted in excessive capacity relative to demand o Canadian Northern facing seemingly insurmountable financial difficulties - World War I o introduction of the Military Services Act in 1917 led to riots and demands for money as well as manpower to support the war  introduction of ‘temporary’ income tax - Division within Canada o English Canadians were demanding conscription of manpower for the fighting front; French Canadians bitterly opposed it - pressure was mounting for a federal election, the first in six years, with widespread support growing for a Union government – a coalition of Conservatives and English-speaking Liberals - revolutionary sentiment abroad, led by Lenin in Russia - prohibition of the sale and consumption of liquor - granting of the electoral franchise to women - inflationary pressures on food prices Summer 1917: ‘The Railway Mess’ royal commission - traditional Canadian tool for problem solving - appointed in 1916 to study the railway problem - recommended that the government take over the ailing Canadian Northern Railway - Borden disliked but had decided to accept - Mackenzie argued against the decision, claiming that the commission had made serious accounting errors in its report ‘the railway mess’ - ‘irrational exuberance’ led to the construction of far too much capacity - solution was for the government to take over the Canadian Northern and consolidate several other railway lines - resulted in the creation of the largest crown corporation in Canadian history: the Canadian National Railways, to be known by its short form the CN Sir Wilfrid Laurier’s Railway Policy Wilfrid Laurier - led the Liberal Party in winning the 1896 election - first French Canadian prime minister in Canadian history - simply co-opted most of the Conservative’s famous National Policy: a protective tariff, which the Liberals supported until the 1911 election; the settlement of the west; and a national railway, the Canadian Pacific - pronounced that the twentieth century belonged to Canada o authorized the construction of a second transcontinental railroad in 1903  shared Macdonald’s vision (nation stretching from sea to sea) but decided to go one better  had the good fortune to be prime minister during boom times encouragement of the building of a second transcontinental line led to both short- and long-term problems - by 1917, Canada had three major railways, not to mention a number of smaller ones competing for business - led to the resignation in 1903 of his minister of railways, A.G. Blair, who favoured government ownership and operation of railways, which Laurier opposed. Laurier could accept the idea of governments constructing railways but he was adamantly opposed to governments operating them. longer-term - Laurier’s decision to build a new transcontinental system set off an unrealistic building boom o led to a proliferation of railways and much waste of public money in support of building more o policy of ‘intoxication’ that invited a flood tide of railway construction and led, inevitably, to the ebb of retribution in its wake railways appeared to be doing well as the war approached but it was big business that was not sustainable A Flood Tide of Railway Construction Problems faced by railways before WWI - capital-cost overruns o expanded rapidly and burnt up capital o capital structure relied heavily on debt funded by British investors - faced significant overcapacity o costs had begun to exceed estimates substantially o Canadian Northern went back to the government again in 1914 asking for financial aid – nearly $100 million this time o government agreed to bond guarantees for half of that amount and the transfer of a larger block of stock (the government now had a 40 per cent equity position in Canadian Northern) - inadequate rolling stock These problems were exacerbated by the fact that the British government banned the export of capital, and the London market had been the main source of Canadian railway financing The Penalty Stage of Railway Development problems became more manifest after the war - in 1915, although passenger traffic held up, freight traffic dropped by 14 per cent, causing gross earnings and net earnings to decline by nearly 20 per cent - Neither Grand Trunk nor Canadian Northern was able to cover operating costs let alone service its debt Government’s problems - 1915: government took over operation of the National Transcontinental from the Grand Trunk Pacific - minister of finance was increasingly concerned about the country’s creditworthiness and ability to continue the war effort should any of the railways go bankrupt - 1916: government was again required to provide financial assistance to the Canadian Northern (in which the government already had acquired a 40 per cent equity position and the railway company was now asking for $15 million) as well as to the Grand Trunk Pacific, which was asking for an additional $8 million The financial collapse of the two railways, Canadian Northern and Grand Trunk, would be devastating - both companies had secured significant provincial guarantees - Toronto-based Bank of Commerce had huge outstanding loans to Canadian Northern - A collapse would create a negative long-term impact on Canada’s general creditworthiness in international financial markets, disastrous for a government that ‘was already strained to the limit trying to organize and finance the increasingly ghastly war effort’ royal commission in July 1916 - Chairman: A.H. Smith, president of the New York Central Railway; other commissioners were Sir Henry Drayton from Kingston, chairman of the Board of Railway Commissioners and soon to be Canada’s minister of finance, and W.M. Acworth, a British railway expert - split decision in May 1917 - American chairman delivered the minority report and dissenting view o Canadian Northern take over the Grand Trunk Pacific’s lines in the west and provide competition to the CPR in that part of the country o in eastern Canada, the Grand Trunk do the same with the Canadian Northern’s eastern lines o government take over and operate the uneconomic route that ran across the Canadian Shield from Quebec to Manitoba, for both the Canadian Northern and the Grand Trunk - Commissioners Drayton and Acworth opposed the acquisition of the Canadian Northern and Grand Trunk railways by either the CPR or the government - recommended that all the railways of Canada be nationalized, except for American lines and the CPR o Canadian Northern, the Grand Trunk, the Grand Trunk Pacific, the Intercolonial, and the National Transcontinental will be nationalized o all to be transferred, by act of Parliament, to a Board of Trustees, called the Dominion Railway Company (board was to be non-political, permanent, self-perpetuating, and not subject to either direct government or parliamentary control) o The new company would own the rail lines and the government would be responsible for the interest on the existing securities. The new Canadian National Railways would require at least $50 million to get started for
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