Wednesday, August 24, 2011

Collapse of Newfoundland

National debt can kill a democracy.  In fact in the case of Newfoundland, they can get desperate enough to vote themselves out of existence.

And we are all about existential terminal ideas here.

transcript of Michael Crummey:  “Galore” from Diane Rehm show, NPR, Rebroadcast 23 August 2011.

Michael Crummey:

Newfoundland joined Canada in 1949, so both of my parents were born Newfoundlanders and became Canadians in 1949. And the vote to join Canada, the referendum, was a very, very close one. The original vote, there were three options, one was joining Canada, one was joining the United States and one was returning to independence, which Newfoundland had given up when it went bankrupt in the 1930s.

Diane Rehm:

It simply gave up?


The only democracy in history, I think, to have voted itself out of existence. And there were lots of reasons for that, the Depression had a huge impact, but Newfoundland also was hugely involved in the First World War. It was a British colony for a long time, so it jumped into the war, borrowed a lot of money from Britain in order to finance its part in the war. And it was one of two countries ever to pay back its war debt to Britain and that had a huge impact.

So in the '30s, it was -- the place was destitute and they sort of had a vote in which they gave up control to a panel appointed by the Brits. And the Brits, I think, were quite anxious to get rid of Newfoundland. They really wanted Newfoundland to join Canada so they wouldn't have to be in this position again, so there's a lot of talk that the vote, the Confederation vote, was rigged.

The final -- in the first vote, independence won, joining Canada came second, joining the States came third and there wasn't a clear winner. So they decided to have a runoff between the top two. The final vote was, I think, was 51 percent to join Canada, 49 percent for independence. And a lot of people still to this day think that that was rigged somehow.


A rigged vote?


And who knows? But the fact that people feel that strongly about it still speaks to how strongly they felt about that. So there were a lot of people who I think never felt like Canadians. And I think that's waning now, but it was very strong for a long time.

Newfoundland has tangled roots with both France and Britain with parts of it being originally French, and then resettled by the British after what we in the U.S. call the French and Indian War, and the Europeans refer to as the Seven Years war.

They were given self government, by the British 26 September 1854, and Dominion Status in 1907.

The rough sketch of what came to pass is noted by the author above.  For a more detailed description, we turn to Wikipedia:

The Collapse

Newfoundland's economic crash in the Great Depression, coupled with a profound distrust of politicians, led to the abandonment of self-government. Newfoundland remains the only nation that ever voluntarily relinquished democracy.

Economic collapse

Newfoundland's economy collapsed in the Great Depression, as prices plunged for fish, its main export. The population was 290,000, and the people and merchants were out of money. Since there was relatively little subsistence farming, people depended heavily on the meager supply of government relief, and it is much emergency help with their friends, neighbors, and relatives could spare. There were no reports of starvation, but malnutrition was widespread.

The depression was hard on both the fishermen and merchants in Battle Harbour, Labrador, and they almost came to blows. The Baine, Johnston firm had to cut winter credit, whereupon poorer fishermen threatened the company with violence. Government relief payments were too scanty.

Political collapse

The government was broke. It had borrowed heavily to construct and maintain a trans-island railway and to finance the country's regiment in the World War. By 1933, the public debt was over $100 million compared to a nominal national income of about $30 million. Interest payments on the debt absorbed 63% of government revenue and the budget deficit was $3.5 million or over 10 percent of the island's GDP. There was no more credit; a short-lived plan to sell Labrador to Canada fell through. The Richard Squires government was ineffective and when Squires was arrested for bribery in 1932 he fell from power.

A royal commission under Lord Amulree examined the causes of the financial disaster and concluded,

"The twelve years 1920-1932, during none of which was the budget balanced, were characterized by an outflow of public funds on a scale as ruinous as it was unprecedented, fostered by a continuous stream of willing lenders. A new era of industrial expansion, easy money, and profitable contact with the American continent was looked for and was deemed in part to have arrived. In the prevailing optimism, the resources of the Exchequer were believed to be limitless. The public debt of the island, accumulated over a century, was in twelve years more than doubled; its assets dissipated by improvident administration; the people misled into the acceptance of false standards; and the country sunk in waste and extravagance. The onset of the world depression found the island with no reserves, its primary industry neglected and its credit exhausted. At the first wind of adversity, its elaborate pretensions collapsed like a house of cards. The glowing visions of a new Utopia were dispelled with cruel suddenness by the cold realities of national insolvency, and today a disillusioned and bewildered people, deprived in many parts of the country of all hopes of earning a livelihood, are haunted by the grim specters of pauperism and starvation."

In return for British financial assistance, the newly elected government of Frederick Alderdice agreed to the appointment by London of a three-member royal commission, including British, Canadian, and Newfoundland nominees. The Newfoundland Royal Commission, chaired by Lord Amulree, recommended that Britain "assume general responsibility" for Newfoundland's finances. Newfoundland would give up self-government in favor of administration by an appointed governor and a six-member appointed Commission of Government, having both executive and legislative authority. The solution was designed to provide "a rest from politics" and a government free of corruption. The legislature accepted the deal, formalized when the British Parliament passed the Newfoundland Act, 1933. In 1934, the Commission of Government took control; its six appointed commissioners, who administered the country without elections. It lasted until 1949.

We noted earlier, that the climate for small countries can vary considerably.  The breakdown in trade after World War 1, would have left a more hostile environment for small countries. 

Alberto Alesina and Enrico Spolaore

Small countries have a particularly strong interest in maintaining free trade because so much of their economy depends on international markets. Indeed, we could think of two possible worlds. One world of large and relatively closed economies, and another of many more smaller and more open economies.

Newfoundland still had the advantage of the protective umbrella of a larger military, so that ongoing military expenses could be curtailed, but the cost of living had gone up for them.

It came to the point, where the continued system became too miserable.  Having options, the key power elite in the country – the voting population in this case, abandoned the structure.

Russia has back tracked on their democratic reforms, and Hungary appears to be headed that way as well.  They don’t really have the option to vote themselves out of existence, but without too much argument, they are coming close.

It should be also noted, that if global trade breaks down, it will be the smaller countries that will become most vulnerable.


Anonymous said...

That bit from the Royal Commission read like a modern day description of the good ole USA. Maybe we should vote to sell ourselves to Mexico. Oh I guess we decided China could buy us out. I don't remember that vote. Dennis

russell1200 said...

It was the vote when we decided we would let the rest of the world devalue their currency reletive to ours. That's why we are the worlds big buyers, have so much stuff, and inflation isn't out of control.

Of course when China entered the world marketplace is was bound to have a huge impact. We just didn't have to be so stupid about it.

Your right about the Royal Commission findings sounding like us. The big difference is that as a large country, we can make a lot of our own stuff if we so choose, and don't need the imports to survive. Newfoundland did not have that choice.