TCH: Funding Canada’s Nation-Building Railroad

           Projects of immediate national significance, even when privately owned, are infrequently left to their own management and their own devices. Acceptance of government regulation in exchange for subsidies or other concessions usually constitutes the manner in which such projects get off the ground, especially for those that attempt something never done before. Private entrepreneurship, critical for the endeavor, supplies management expertise and some capital, but state assistance may form part of the financing puzzle for grand new ventures. This was precisely the formula for building a railway across Western Canada, one that did not merely connect existing centers of production or commerce like most railways do, but created entirely new ones. The construction of the Canadian Pacific Railway in the late 19th century helped build a new country.

George Stephen

           George Stephen, the future industrialist, financier, and railway magnate, was born in Scotland in 1829. After two years in London, he arrived in Canada in 1850 and took up residence in Montreal. At the time, the still ununified Canada had a population of perhaps 2.5 million people, about the same as the population of London by itself. By 1865, Stephen was running a successful dry goods importing firm and within a few years, his business interests spanned from textiles to ironworks. From there, Stephen became a financier, eventually becoming president of the Bank of Montreal in 1876.

           In the 1870s, the world was in the midst of a railway boom and Stephen dove into the industry when he purchased, with partners, the Minnesota-based St Paul and Pacific Railroad. The 1879 acquisition was financed with a loan from the Bank of Montreal. The apparent conflict of interest where a president was securing a loan from the bank he managed caused something of a scandal in Montreal’s financial community. Nonetheless, the railroad was now in his hands and, alongside his partners, he began funding an expansion of the railroad from the United States into Manitoba. The line was correspondingly renamed the St Paul, Minneapolis and Manitoba Railroad.                      

Railroad

           Railways were of particular importance to Canada, especially following the country’s confederation in 1867 and the reelection of Sir John A. Macdonald as prime-minister in 1878. His government favored higher tariffs to encourage domestic production and investment in a national railroad. The latter was an issue of federal significance owing to British Columbia’s decision to join the confederation in 1871. In return, it demanded a railroad connection to the province within ten years. To fulfil its promise to the new province, an agreement was reached between the government and Stephen in 1880 to build a railway crossing Canada.

           Macdonald had grand ambitions for Canada and had executed on them before by enlarging the new country with the purchase of Rupert’s Land from the Hudson’s Bay Company. However, this was not his first try at a transcontinental railroad. An earlier attempt was scuttled by scandal when, in 1872, a contract to construct the railway line was given to Donald Alexander Smith, George Stephen’s first cousin, a fellow Scot, and also an eventual president of the Bank of Montreal. As it happens, Smith had donated to Macdonald’s Conservative Party. The deal ignited the so-called ‘Pacific Scandal’ that prompted Macdonald’s earlier resignation. Nonetheless, the prime minister got his job back in 1878 and like Macdonald, Smith was back as well. Now, eight years later, Smith had joined the new consortium led by Stephen.

Expenses and Financing

           Canadian Pacific Railway was incorporated in 1881. By this point, the country was well behind schedule in fulfilling its promise to British Columbia. Nonetheless, Macdonald’s government was willing to pour great resources into the project. It was a private operation but one irrefutably tied to the national interest and as such was handsomely supported by the state. The substantial subsidies provided by the federal government included the provision of C$25 million in cash and twenty-five million acres of land to the company. This immediate assistance was paired with tax exemptions, the covering of surveying expenses, and a twenty-year monopoly preventing the construction of any new railroads south of the Canadian Pacific Railway line.

           Despite this aid, far more funds would be needed; constructing the railroad to the Pacific from Ontario would cost an estimated C$100 million. Further, George Stephen believed that the railroad would have to connect to eastern cities to be successful and to that end also dedicated much of his time and resources to acquiring and constructing lines in Ontario and Quebec. Stephen relied on a small syndicate of investors and, finding little investor interest in London and New York, he pledged his own St Paul, Minneapolis and Manitoba Railroad stock to borrow funds for the Canadian Pacific Railway. He even mortgaged his Montreal mansion to fund the company. Some of the land given by the government was also sold to provide proceeds which could be reinvested into the railroad.

           Stephen’s efforts did not eliminate the need for further aid from the federal government. New subsidies were provided to the railroad in 1884, including new loans to the tune of C$22.5 million, a government guarantee of the company’s dividend payments, and payment of some further expenses. However, by now, the east-west line was close to completion. Macdonald’s vision was realized in November 1885 when the last railroad spike was driven into the ground in Eagle Pass, British Columbia.

Completion

           The railroad’s construction was finished in less than five years’ time. This was remarkably fast given the technical challenges of crossing the Canadian Shield, a region of lakes, bogs, and surface-level bedrock as seemingly impenetrable as it appears interminable. After this, laying track across the Rocky Mountains presented its own challenge of course. Nonetheless, despite its completion, the Canadian Pacific Railway was not an immediate financial success.

           In fact, more government aid came again in 1885 and 1888. This was not without some concessions made by the railway. Support in 1888 came with a partial repeal of its monopoly, allowing lines to branch off the railroad in its monopoly territory. This was sacrificed given growing political opposition to the company’s monopoly, including from provincial leaders in Manitoba.

           Partially because of the loss of the monopoly, Stephen resigned as president in 1888. He returned to Britain but remained a director in the company and travelled back to Canada on occasion. In his retirement, he became Baron Mount Stephen when he was granted a peerage in 1891, the first Canadian to be given one. Stephen’s cousin and partner at Canadian Pacific, and the Bank of Montreal before that, Donald Alexander Smith, was also given a peerage in 1897, becoming the 1st Baron Strathcona and Mount Royal.

Grain, Mines, and Settlers

           Government support came at a price that included more than just the early sacrifice of Canadian Pacific Railway’s twenty-year monopoly. Further aid still to come was extended with other conditions. A notable example included the fixing of freight rates at reduced levels for grain and certain personal property in exchange for support provided in 1897.

           This aid, comprising C$3.3 million in cash, helped fund an extension of the railroad into new mining regions in British Columbia. However, the arrangement stimulated development in Western Canada in other ways. Lower freight rates helped encourage grain production in the prairies. The fixed rates became known as the ‘Crow rates’, named after the project the state assistance funded, and remained a fixture of Canadian transportation policy for almost a century.

           Part of the reason Macdonald’s government spent so lavishly on the railway was that it would help unify Canada. Prior to the Canadian Pacific Railway, grain from the west would travel to the rest of Canada through the American railroad owned by George Stephen, the St. Paul, Minneapolis and Manitoba Railroad. From there it would arrive on the Great Lakes in Duluth, Minnesota and be loaded onto ships bound for Sarnia in Ontario where the grain would be put on trains again, this time bound for the rest of Canada. Similarly, settlers travelling west prior to the new railroad’s completion would frequently do so through the United States. Though geographically contiguous, Canada was logistically segmented until the railroad was completed.

           What Macdonald and Stephen had worked towards was nothing less than the construction of a new Canada in the west. Indeed, Stephen believed that westward migration should go hand-in-hand with the railroad’s construction, having seen how immigration had provided a tailwind to his railroad in the United States. For westward-bound settlers, the railroad was a fast new means of travel. Passenger traffic on the Canadian Pacific Railway began in 1886 when a train left Montreal on June 28, passed through Winnipeg on Canada Day, July 1, and arrived in Port Moody, British Columbia three days later.

           Despite all this, it took a long time for Canadian Pacific Railway to become financially successful and independent of government assistance. In fact, more of George Stephen’s wealth came from his ownership in the St Paul, Minneapolis and Manitoba Railroad, which later combined to form the Great Northern Railway, than from Canadian Pacific. However, though it may have seemed an expensive boondoggle in terms of direct financial results, the railroad was significant to the development of Western Canada and the trajectory of the new confederation.

Lesson

           It’s obvious to see how the construction of a railway can boost the economy of a particular region. Therefore, it is no mystery at all why governments would dedicate substantial resources to railroad construction. In the case of Canada after its confederation, railway construction, and the Canadian Pacific Railway specifically, comprised one of the largest political concerns of the day. Finding disinterest in London and New York, public and private money in Canada together helped finance the railway that stimulated the growth of Western Canada.

More from the Tontine Coffee-House

           Read about how railroad construction helped develop the American bond markets. Also, learn more Canadian financial history, including the use of playing cards as money in colonial Quebec and Alberta’s ‘Prosperity Certificates’.

Further Reading

1.      Everitt, John. “A History of Grain Elevators in Manitoba.” Economic History Theme Study. Preserve Manitoba's Past., 1992.

2.      Lavallé, Omer. “Canadian Pacific Railway.” The Canadian Encyclopedia, Historica Canada, 24 Jan. 2018.

3.      Reford, Alexander. “Biography – STEPHEN, GEORGE, 1st Baron MOUNT STEPHEN – Volume XV (1921-1930).” Dictionary of Canadian Biography, Vol. 15, University of Toronto/Université Laval, 2005.

4.      Regehr, T.D., and Ken Norrie. “Crow's Nest Pass Agreement.” The Canadian Encyclopedia, Historica Canada, 24 Jan. 2014.