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Chapter

ADMS 1010 Chapter Notes -Canadian Northern Railway, Canadian National Railway, Irrational Exuberance


Department
Administrative Studies
Course Code
ADMS 1010
Professor
Alison Kemper

Page:
of 5
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 both existing fixed charges and for interest on new capital. (By this
point, the various railways had received over $1 billion in government assistance through loans,
sale of lands, subsidies, guarantees, etc.)
Sir Thomas Shaughnessy
- president of the CPR
- feared competition from a publicly owned system
- proposed that the railways, including the CPR, be taken over by the government but managed by the
CPR with guaranteed returns for the CPR shareholders
o Cabinet rejected this proposal, partially because the idea of a railway monopoly was anathema
particularly in western Canada
Legislation passed in August 1917
- Acquisition of stock in Canadian Northern Railway for not more than $10 million (par value of the stock
was $60 million), subject to arbitration
- all government railways placed under the Board of Railway Commissioners. This included the
Intercolonial, which had been created and owned by the government of Canada since Confederation in
1867; the National Transcontinental from Moncton to Winnipeg; and now the Canadian Northern
system, operating primarily in the west and but with some lines in the east.
- bill was introduced amidst allegations from Liberals that it was a payoff for the Bank of Commerce,
National Trust, and Mackenzie, a well-known Conservative supporter
The Best Choice in Unfortunate Circumstances