Squires' second ministry from 1928-1932 had to confront problems caused to Newfoundland's exports because of a world economic depression that lasted for a decade from 1929. The depression had a devastating effect on the Newfoundland economy, whose prosperity depended upon world demand for its primary exports--fish, pulp and paper, and minerals. By 1931 Squires had great difficulty trying to maintain with reduced revenues both essential public services and interest and principal payments on the national debt. In the end, he chose the latter over the former as a priority of his government, the other alternative being national bankruptcy in 1932.
For Coaker in 1928 his inclusion in a political alliance with Squires, represented one last chance to effect needed fisheries reforms that had been central to the philosophy of the FPU. As a Minister without a portfolio in the Squires cabinet, he successfully pressed for government action in the fisheries. In 1930 a government Commission of Enquiry into fisheries matters recommended a policy similar to that of the 1920 Coaker Regulations, but this time there was a proposed exclusion in its provisions concerning price controls. This proposed policy would invest absolute authority for its overall enforcement in the exporters themselves rather than in a public advisory board. When opposition to the proposed policy arose within government ranks, the matter was deferred for a year. When the policy failed to be implemented in 1931, the following year the Board of Trade, which now finally saw the merits of the Union's ambition for fisheries reform, requested the government to enact the proposed legislation, which was acted upon. Confident that he had at last achieved his much cherished fisheries reform, later in 1932 Coaker retired from politics. Despite this apparent success, disappointment for him would soon follow because the exporters would fail to implement the very policy of reform they had finally come to accept.
As previously noted, the impact of the depression on the Newfoundland economy was devastating.
"Between 1928 and 1933 fish prices fell by 48 per cent and newsprint prices by 35 per cent. The value of total exports fell by 27 per cent over the same period, imports by 44 per cent. government revenues, still largely derived from custom duties, declined by 11 per cent, though there were increasing demands for relief payments, occasioned by fisheries failures in 1930, 1931, and 1932. The cost of debt servicing was becoming unbearable." (Hiller, "Newfoundland Confronts Canada," in E.R. Forbes and D.A. Muise, eds., The Atlantic Provinces in Confederation, p.452)
Until 1931 the Newfoundland government had found ready takers for any debentures it proposed to float in the international markets, despite the fact that the island had established no sinking fund for the retirement of debentures once they matured. Since 1920, the government had operated its annual budget on a deficit basis, borrowing loans to repay old maturing loans and to finance relief and capital expenditures. In 1928, for instance, the government raised a $10 million loan to retire a war loan of $7.5 million and to cover the budget deficit and provide for capital expenditures. The following year $6 million had to be borrowed to redeem a 1905 loan, while in 1930 it raised another loan of $5 million for similar purposes. In 1931, however, the Squires government discovered that the Canadian banks, which had been giving it these loans, refused to do any further business with the country. Their concerns were the dwindling revenues of the Newfoundland government and the increasing proportion interest and principal payments made up of these revenues. In 1931 the national debt stood at approximately $100 million with interest payments consuming 65 percent of current revenues.
Squires appealed to the Canadian banks to change their decision, because he needed a loan to help the government to meet its debt interest payments due on June 30, 1931. Eventually, Squires' personal intervention with Canadian Prime Minister R.B. Bennett resulted in the latter persuading the banks to loan Newfoundland a further temporary loan of $2 million to meet its June 30 deadline. The loan, however, came with several preconditions which Squires had no alternative but to accept. The government agreed to a policy of tariff revision and retrenchment in public expenditures. It would also ask the British government to appoint a financial advisor to undertake the following tasks:
1. Investigate the whole financial structure of the Dominion.
2. Revise and reconstruct the Customs tariff, including the revision of other sources of national revenue, on a basis designed to afford the Dominion a more substantial and certain income.
3. Advise on the reorganization and coordination of the various public services.
4. Make recommendations with a view to strengthening the Dominion's finances; the positive assuring of a continuing balancing of the budget; the creation of a sinking fund for outstanding and future bond issues; and the bringing into effect of a plan of long-term financing of short-term indebtedness. (S.J.R. Noel, Politics in Newfoundland, p. 191)
In August 1931 the Squires government made arrangements with the British government for the appointment of Sir Percy Thompson, deputy chairman of the Board of Inland Revenue, to be its financial advisor. It also appointed Robert J. Magor, a Montreal businessman, to be its advisor on the reorganization of the railway, dry dock, telegraph system, and other public utilities. In November Thompson made his interim report to the government, which was again facing the prospect of defaulting on its debt interest payments if more loans were not forthcoming. Thompson's suggestions dealt mainly with ways the government could tighten up the financial administration of the Dominion. These suggestions included a reorganized Department of Finance with greater control over the daily expenditures of public funds through the creation of a treasury board modelled on the British system. He also made recommendations for administrative economies in various public departments.
The looming prospect once more of the possibility of Newfoundland defaulting on its debt interest payments on December 31, 1931--a prospect neither the British and Canadian governments welcomed because of the irreparable damage it could do to the reputation and credit rating of the Empire as a whole--resulted in further successful appeals by Squires and Bennett to the banks for more assistance. On this occasion, the banks made another conditional loan of $2 million available to Newfoundland. In return, the Squires government agreed to the several conditions established by the banks. These were the following:
1. The government must pass legislation preventing the export of gold and making the notes of the syndicate banks legal tender. The banks would be relieved of any obligation to pay these notes in gold.
2. Government must balance its budget and make provision for a sinking fund.
3. The government will pay the whole of the proceeds of the customs duties day by day into a special account at some bank to be nominated by the four banks. The special account is to be carried in the joint names of Sir Percy Thompson and the Comptroller of the Treasury with provision for a deputy in each case. This procedure shall be put into force at the earliest possible date after the first of January.
4. Until the 30th of June (1932) the persons named in the preceding section shall set aside each week and pay over to the consolidated revenue fund such amount as will be sufficient for the maintenance of the public services upon the minimum scale necessary for their continued functioning...and shall retain the balance for the purpose of the payment of interest on the whole of the public debt. As from the 1st July 1932 and until the end of the first year in which the Newfoundland budget is shown to have balanced the persons named in the preceding section shall retain each week out of the funds standing to the credit of the Special Account a sum ascertained on a basis to be agreed upon such that over each six monthly period an amount will be accumulated sufficient to pay the interest on the public debt and the balance shall be paid over to the exchequer.
5. The government will appoint an advisor appointed by either the Imperial or Canadian governments and authorized to furnish the Syndicate Banks, with reports in writing of any matters "which come to his attention of which, in his opinion, the Banks should be informed."
6. The government will pass legislation requiring the repayment of temporary loans by new temporary loans.
7. The government will endeavour to raise an internal loan.
8. The government will float a bond issue as early as possible in order to repay the syndicate banks their temporary loans.
9. The banks told the government that they will not provide it with any more loans. After June 30, 1932 the banks expected the government to meet the interest payments on the national debt (S.J.R. Noel, Politics in Newfoundland, 19697).
In accepting these conditions, the Squires government had found, as S.J.R. Noel has noted, that the "last door of orthodox finance, forcibly held ajar for more than a year, had now been shut...." Despite the rather austere cuts the Squires government made in public services and expenditures, it was still not possible for the budget to be balanced for the 19311932 fiscal year. Instead, the deficit for that year was the largest to date in Newfoundland's history.
Expectedly, the additional restraint programs led to public disenchantment with the Squires government, which in February 1932 was shaken by a major political defection amidst charges of political corruption. Three days previous to the opening of the legislature on February 4, 1932, the Minister of Finance, Peter Cashin, resigned without public comment. When the House of Assembly met on February 4, Cashin rose from his seat and accused Squires of falsifying the minutes of the Executive Council to cover up certain legal fees he had been paying himself out of public funds. He also accused other members of the cabinet with misuse of public funds as well and Dr. Alex Campbell, Squires' closest political friend who had been investigated a decade earlier by Hollis Walker for corrupt practices, of failing to file his income tax return. The charges proved sensational and inflammatory to the St. John's poor and unemployed, which had been informed that various austerity measures had been necessary because the government was nearly bankrupt. On February 11 a gathering of several hundred people collected outside the Prime Minister's Office, located in the Court House, and demanded relief assistance that was eventually granted but not before they forced their way into Squires' office. Five days later another large crowd convened at the Colonial Building in anticipation of Cashin's intention to elaborate further in the Assembly on the charges he had made against the government. In response to the charges, Squires successfully convinced the Assembly to appoint an inquiry by the Governor into the claim that the minutes of the Executive Council were in error. Governor Sir John Middleton replied to the Assembly that it had no constitutional right to question the accuracy of the minutes, a reply which avoided the central issue for Middleton of having to admit that he may have been duped by the cabinet into signing incorrect minutes. While the Governor refused to comment on the substance of the minutes, there was enough information from other sources come to light concerning the alleged miscues of public funds to weaken what little public confidence there remained in the government.
In the middle of this growing crisis, on March 23 the Assembly passed legislation increasing customs duties, especially on essential food items, and making further reductions in public expenditures, including that in the pension payments made to ex-servicemen. These measures resulted in the resignation of three more members from the government ranks, including H.M. Mosdell, a minister without portfolio. On April 5 the frustrations of the unemployed towards the Squires government took a turn for the worse when a mob of ten thousand people stormed the doors of the building, which the mounted police unsuccessfully failed to defend. While the mob was kept from the floor of the legislature where the House of Assembly was in session, they did occupy the basement of the building, looting and destroying public documents in the process. Fearing for his life, Squires managed to escape secretly through a side exit of the building and into hiding for a day. The following day Cashin announced that Squires had stated, in his and Coaker's presence, that he would resign office immediately. Emerging from hiding the next day, Squires flatly denied Cashin's claim and at a subsequent meeting of his supporters decided to hold a general election as soon as possible. This election was set for June 11 and Coaker and several Unionists immediately declared their intentions not to run.
In his bid once more for re-election, Squires again promised the electorate a platform of industrial and agricultural development, as he had in three previous elections, bonuses for the fisheries, and the attainment of that elusive goal of a balanced budget. As for the opposition, Alderdice had reorganized his party under the new name of the United Newfoundland Party and promoted himself, as he had in 1928, as a plain man of business. Supported by the merchants of Water Street, Alderdice in his manifesto promised to "repair the damages wrought by the misgovernment, misconduct and tragedies of the past few years, and give the country a safe and sane administration of its affairs, with fair play to all and favor to none...." The main plank in his platform was a promise that one "of my first acts will be the appointment of a committee, the members of which will serve without remuneration, to enquire into the desirability and feasibility of placing the country under a form of commission government for a period of years. In case the proposal is favourably reported upon, it will be submitted to the electorate for their approval. No action will be taken that does not first have the consent of the people...." This was a policy that even the recently retired Coaker strongly approved. The election saw the United Newfoundland Party win 25 of the 27 seats--earlier in 1932 representation in the Assembly had been reduced from 40 seats to 27 seats by the Squires government as an austerity measure--and the Water Street merchants placed in office to deal with the near financial collapse of the country.
Alderdice had avoided default on debt interest payments for June 30, 1932 because of a recent action taken by the former Squires administration. Squires had made an agreement with Imperial Oil Company whereby that company agreed to take Newfoundland government bonds valued at $1,750,000 and to pay the government a minimum annual royalty of $300,000 in return for a monopoly on all petroleum products which were either imported or manufactured and sold in Newfoundland. Default on December 31, 1932 was averted through the intervention of the British and Canadian governments after Alderdice threatened to default. Both countries agreed to loan Newfoundland a joint loan of $1,500,000 in return for Newfoundland accepting the appointment of an Anglo-Canadian commission of investigation into the island's political and economic affairs and future prospects. Newfoundland had no choice to accept this offer of assistance, since the British had already decided that under no circumstances would Newfoundland be allowed to default.
On February 17, 1933 the British government issued a Royal Warrant appointing a Commission of three to "examine the future of Newfoundland and in particular on the financial situation and the prospects therein." Britain's nominee on the Commission was William Warrender MacKenzie, Baron Amulree, a Scottish lawyer and former Labour politician. Its second nominee, which it appointed after consulting the Canadian government, was Charles A. Magrath, a Canadian banker. Newfoundland's nominee on the Commission was another Canadian banker, Sir William Stavert, who was an advisor to the Newfoundland government. During the summer of 1933 the Newfoundland Royal Commission held about 100 formal sittings--mainly in camera--and heard from 260 witnesses. On October 4, 1933 the British government submitted the Commission's Report to the House of Commons. Its main recommendations were the following proposals.
1. The suspension of the existing form of government until the time the Island becomes self-supporting again.
2. The creation of a special Commission of government, which would be presided over by the Governor, would be vested with full legislative and executive authority, and would take the place of the existing Legislature and Executive Council.
3. The Commission of government would be composed of six members, exclusive of the Governor, three of whom would be drawn from Newfoundland and three from the United Kingdom.
4. The government departments on the Island would be divided into six groups. Each group would be placed in the charge of a member of the Commission of government, who would be responsible for the efficient working of the departments in that group, and the Commission would be collectively responsible for several departments.
5. The proceedings of the Commission of government would be subject to supervisory control by Your Majesty's government in the United Kingdom, and the Governor-in-Commission would be responsible to the Secretary of State for Dominion Affairs in the United Kingdom for the good government of the Island.
6. Your Majesty's government in the United Kingdom would, for their part, assume general responsibility for the finances of the Island until such time as it may become self-supporting again, and would, in particular, make such arrangements as may be deemed just and practicable with a view to securing to Newfoundland a reduction in the present burden of the public debt.
Although the Alderdice government had promised in 1932 to submit any proposal constitutional change to the people for public approval, it decided against such a course of action, the surrender of self-government being the price the British government demanded for its saving Newfoundland from financial bankruptcy.
For the Newfoundland prime minister the surrendering of responsible government was the only alternative to a default. "We have tried to formulate alternative courses but without avail... I am afraid there is nothing for us but to take it or leave it. The terms that have been offered are very generous that it seems to me it would be ungracious to ask if they could be improved upon. These proposals have come to us unasked and unsought. They constitute in my opinion one of the most generous proposals that has ever been extended by the Mother Country to any member of the British Commonwealth of Nations. It is unthinkable that we could expect to avail ourselves of the financial aid so generously extended without expecting that the United Kingdom would have some supervision over expenditure in this country..." (quoted in Peter Neary, ed., The Political Economy of Newfoundland, 19291972, p. 43). Noting that the Amulree Report painted a dark picture of Newfoundland's political history--"we must at least do them the justice to admit its truthfulness"--Alderdice claimed that "responsible government is only a theoretical boon, and in our case it has proved a curse instead of a blessing. If we accept the proposals of the Home government, not one man in five hundred will know the difference except that he will see prosperity restored to the country." For the country's most prominent newspaper, the St. John's Evening Telegram, the legislature's decision to seek a constitutional change, "Newfoundland's difficulties in no small measure resulted from the low level to which politics had fallen was not an eye-opener. It had long been realized, but unfortunately the body politic delayed action so long that drastic measures became imperative to ensure that the country's recovery from the damage inflicted."
Despite the bleak picture painted by the Amulree report, the financial collapse was because of the heavy burden of Newfoundland's public debt. As Hiller observes in his article "Newfoundland Confronts Canada" (p. 455)
analysis of the Newfoundland public debt in 1933 shows that 35 per cent was attributable to the development of the railway; 60 per cent was accounted for by the railway and other development expenditures...; that over 70 per cent was chargeable to these and the war debt; and finally the lion's share of borrowings made to cover budget deficits was in order to keep the railway operating.
In 1920 the debt service had accounted for 20 per cent of the government's annual revenue; by 193031 serving the public debt took over 65 per cent of revenue for that year.