The steady increase in the interest on the public debt and the uncertain fluctuations in the provincial revenue were causing much anxiety. The government was continually being urged to protect the credit of the province by a determined policy of retrenchment. The reduction of the salaries of the officers of civil government and the abandonment of all but the most necessary public works, were suggested as means of reducing the expenditure. The existing system of public finance was too rigid to enable the government to take full advantage of favourable conditions in the money market, and the Sinking Fund too uncertain to inspire confidence in the country's loans. In 1849 a serious attempt was made to place the management of the provincial finances on a sound basis, and to free the government from certain unnecessary burdens. Authority was given the government to redeem outstanding debentures at any time by the issue of new debentures, provided that the total debt was not increased. Sanction was given to a new form of debenture which, although not legally authorized, had been found very useful during the previous year. Debentures of a small denomination, and payable on demand, had been used to secure a public loan. This practice was now legalized, and authority given for the issue of small debentures to the extent of £250,000 currency, provided the total amount of debentures did not exceed the amount authorized by law. An attempt was made to restore confidence in the Sinking Fund by assigning to it all of the net annual revenue from the public works, excepting £20,000, and by crediting it with whatever balance was available from the Consolidated Revenue Fund. At the same time provision was made for the transfer to municipal or private corporations of public works of a local character. With this reorganization of the system of public finance, the government looked forward to a restoration of the public credit. THE RAILWAY POLICY The year 1849 marked the beginning of the government's policy of aid to railways. In connection with the granting of aid to the Halifax and Quebec Railway, general regulations were introduced designed to govern public assistance to all railway corporations. Under certain conditions, the government was prepared to guarantee the interest on loans raised by any company chartered by the province and building a railway within the province of not less than seventy-five miles in length. Interest was not to exceed six per cent, and the amount guaranteed was not to exceed the sum actually expended by the company. The company was required to pay a specified sum to the government to constitute a sinking fund for the redemption of the debt, while the payment of interest was made a first charge on the receipts of the railway. As further security, the government held after the bond-holders a first mortgage on the assets of the company. The prospect of a general guarantee of assistance to railway corporations did not exert a salutary influence, and the government was soon compelled to resort to the policy of adapting its aid to the special needs of the particular occasion. This policy was followed in its dealings with the Grand Trunk Railway Company, incorporated in 1852. The guarantee of the province was given to the extent of £3000 sterling per mile. An amendment to the charter in 1854 authorized a guarantee of £2,211,500, while two years later a further guarantee was made of £2,000,000 in preferential bonds. By 1857 debentures had been issued on behalf of the Grand Trunk Railway to the extent of £3,298,991 currency. At this period aid was being granted to the railways, not only by the government, but by municipal corporations. During the early fifties, various statutes were passed permitting municipalities to buy shares in railway corporations and to assist in the construction of public works of local importance. The claims on the money market created by the normal expansion of Canadian municipalities were alone sufficient to create a severe financial stringency, but, when to these were added the demands caused by the frenzied haste of municipalities to rush to the assistance of railway corporations, the stress became most serious. It was with great difficulty that municipalities could secure loans for strictly legitimate purposes. Under these circumstances the aid of the government was sought, and in 1852 the Consolidated Municipal Loan Fund was established. THE MUNICIPAL LOAN FUND On the credit of this fund the government was authorized to issue debentures for amounts already determined by the by-law of the municipality. Each municipality participating in the fund was required to pay at the rate of eight per cent per annum on the loan. From this fund the interest on debentures was drawn, while the balance was set aside as a sinking fund for the redemption of the loan. A municipality which had borrowed money on the credit of the fund at any time, could not raise a further loan without the sanction of the governor in council, and in case of default of any of its payments, provision was made for levying arrears on the property of the municipality. In 1854 the main provisions of the act were extended to Lower Canada. Two loan funds were established, and each limited to £1,500,000. Full advantage of the loan fund was taken in both Upper and Lower Canada. On December 31, 1858, there were outstanding the following debentures: More significant, however, is the statement of the amount of arrears on interest owed by the municipalities. The arrears of interest, together with the interest accrued, amounted in Upper Canada to $1,393,792.26, and in Lower Canada to $249,036.36, or a total for the two provinces of $1,642,828.62. In Upper Canada loans had been granted to forty-seven municipalities, which in two cases had been redeemed. Of the forty-five municipalities with loans outstanding, only two had been able to pay the interest required by statute, while in Lower Canada each of the thirty-one municipalities was in debt for arrears of interest. The case of the towns of Port Hope and Cobourg in Upper Canada presents in somewhat aggravated form the story of the Municipal Loan Fund. On a loan of $500,000 the town of Cobourg in 1858 owed $171,775, while Port Hope had allowed arrears to the extent of $238,625 to accrue on a loan of $860,000. The operation of the Loan Fund Act revealed the determination of the municipalities to borrow beyond their power of redemption. The result was that the burden fell on the provincial government, and the public credit was correspondingly weakened. This situation called for vigorous action, and in 1859 a bill was passed preventing the issue of new loans, excepting for the purpose of renewal. In order to place the Sinking Fund on a firm basis, authority was given for the collection of a percentage of the assessed value of property in the various municipalities. The increase in indebtedness due to this fund had been effectively checked while the government was compelled to await more favourable financial conditions for the redemption of the debentures outstanding. THE PUBLIC ACCOUNTS A reform in the system of auditing the public accounts was introduced in 1855, when a board of audit was established consisting of the deputy inspector-general, who acted as chairman, the commissioner of customs, and a provincial auditor appointed by the governor. A further change was introduced in 1864 when the board was enlarged by the addition of the deputy receiver-general, the deputy postmaster-general, the assistant commissioner of Crown Lands, and the deputy commissioner of Public Works. Under the new arrangement the provincial auditor acted as chairman. Much of the work of the board of audit was divided among the executive officials, while the final audit was conducted under the supervision of the provincial auditor. The growth of revenue and expenditure, and the increase in the public debt for the years 1850-57 is seen in the following table: The year 1858 marked a period of the most severe financial depression in Canada. The entire continent was passing through a serious financial crisis, which was rendered more disastrous in Canada by crop failures in 1857 and 1858. The effect of the stringency on the public treasury was to reduce revenue and increase expenditure. The total imports for the years 1856-58 showed a steady decline with a corresponding reduction in the customs receipts. The revenue from customs alone for these years was: 1856 . $4,508,882.08 3,925,051.19 The Consolidated Municipal Loan Fund suffered most severely from the general commercial depression. Municipalities were unable to meet the interest on debentures, so that the burden fell on the government. The Treasury was required to advance on this account: The guarantee of the bonds of the Grand Trunk Railway and of the Ontario, Simcoe and Huron Railway constituted VOL. V M |