505. Our investigations have shown clearly that Newfoundland is unable in present circumstances to support unaided the existing burden of the public debt; that the condition of the people generally, already well nigh desperate, will be still further depressed as a result of a fourth consecutive season in which the fishery has failed to yield them a livelihood; that the business houses of the Island have been faced with heavy losses; that the point has been reached where crippling taxation is yielding diminishing returns; and that prompt measures are needed if the country is to be saved from the imminent peril of financial collapse. The measures which it is possible to envisage fall into two categories, those which would be dependent on external aid and those which it would be possible for Newfoundland herself to take. If Newfoundland were to be called upon to rely solely on her own resources, the alternatives confronting her would for practical purposes be confined to, (a) default on the full payment of the interest charges, due half-yearly, on the public debt, with or without currency adjustments, and (b) the sale or lease of Labrador. We propose in the first instance to examine these alternatives.

Battle Harbour Battle Harbour, showing Hospital and Stores. First Station of Grenfell Mission, Labrador, n.d.
Photographer unknown. From the album of photographs furnished to the Newfoundland Royal Commission, August 1933. Courtesy of the Centre for Newfoundland Studies Archives (Coll-207), Memorial University of Newfoundland Library, St. John's, Newfoundland.
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Effects of Default.

  506. It is not surprising, in view of the extreme gravity of the situation, that there should have been some witnesses who felt that, notwithstanding the moral obloquy attaching to default, it was only in this direction that a solution of the Island's difficulties was to be found. The scheme generally favoured by these witnesses was that the Newfoundland Government should issue to the bondholders a statement explaining fully and frankly the financial position of the country; recounting in detail the efforts which had been made during the last two years, by the imposition of increased taxation, by the enforcement of drastic economies and by the strict control of all disbursements, to restore a budgetary equilibrium; and showing that in spite of these efforts, which had called for great sacrifices by the whole community, it was impossible for the country to meet in full the interest payments on the public debt. The statement would conclude with an assurance that the Newfoundland Government would in no way relax their efforts to meet their obligations; that the administration of the Island would continue to be conducted on a basis of strict economy; and that such balance as might remain to the Exchequer after administrative expenses had been met would be set aside each year, in part for the proportionate payment of interest on the bonds, and in part for the establishment of a sinking fund by means of which the bonds could be redeemed as they matured. Alternatively, it might be possible for the Newfoundland Government to announce their intention of adopting a scheme under which interest on the bonds would be paid on a graduated scale, ranging from 1 per cent. for the first five years and 2 per cent. for the next five years and so on by increasing rates of interest until the full service of the bonds might be resumed in, say, 25 years' time; concurrently with the payment of interest on this scale, a sinking fund would be established by means of which the bonds could be redeemed as they matured. It was felt that, if a plan of this character were adopted, the Island would have given proof of its determination to put its house in order and the bondholders would have no serious grounds for complaint.

  507. No part of the British Empire has ever yet defaulted on its loan obligations; in the absence of any precedent, the consequences which would follow from a default by Newfoundland must remain to some extent a matter for speculation. But if no precedent can be drawn from the history of the Empire, instruction may be derived from the experiences of other countries, and it is clear from these that any plan of default such as that outlined above could only be approached with the gravest apprehension.

  508. The fulfilment of a private money contract depends, of course, in the last resort on the capacity of the debtor to pay, and the law provides accordingly for the bankruptcy of an insolvent debtor. But bankruptcy is at best an ugly word and carries a stigma which a nation even more than an individual would do well to avoid. Directly, or indirectly, national bankruptcy is liable to affect the fortunes of every citizen.

  509. It can hardly be disputed that the first effect of a default by Newfoundland would be to shatter the credit of the country. There is no doubt that, even if this did not immediately lead to an embarrassing run on the Government Savings Bank, in which the deposits stand at about $1,250,000, confidence would be impaired, trade would decline, development would be checked, and prospects of increased employment, higher wages and improvement of social conditions generally would be jeopardised. The additional difficulties which the trader would have to face would be doubly serious in that Newfoundland is compelled to import from other countries a large proportion of necessaries of life.

  510. It has been said that the credit of some, at least, of the large and old-established mercantile houses stands so high abroad that it would be possible for them to carry on their import business without difficulty, notwithstanding the effects of a general loss of confidence; the contention advanced is that in these cases the individual merchant has established such close relations with exporters abroad that, although the credit of the country generally might be paralysed, the latter would in their own interests continue to do business with their former associates on the same terms. This, however, is only part of the story. For, even if relations between the larger houses and their foreign associates were not at first impaired, it is clear that many of the smaller houses would be placed in a position of extreme difficulty, that the consequential decline in trade would lead to a falling off of national revenue, and this in turn to further financial embarrassment which, with a general loss of confidence, would inevitably react on the fortunes of the larger houses of the Island, however reputable and well-established. Furthermore, it must be remembered that the losses suffered by the business houses of the Island during the last three years have been on a considerable scale. This state of affairs is doubtless known to their foreign associates, and the knowledge must inevitably detract from the confidence which might otherwise be felt in their continued financial stability.

  511. A further argument sometimes advanced is that, while default would destroy the credit of the Government, this would be all to the good, since it is to excessive borrowing that Newfoundland's difficulties are largely due, and loss of credit would ensure that no such borrowing could be undertaken in future. This again is only part of the story. For, even if the Government itself should be precluded from borrowing again, the shock to national credit would undoubtedly be communicated to the large industrial and commercial undertakings in the country and could not fail to hamper their prospects of expansion. In fact, however, the Government would be obliged to enter the capital market in the near future, in order to repay maturing loans of $6,000,000 due in New York in 1936 and £320,000 due in London in 1938. No sinking fund has been established by means of which these loans could be repaid: the obligation to repay can therefore only be met by fresh borrowing. But it is safe to say that, if the Government were meanwhile to default on interest payments, it would be quite impossible for them to raise a new loan to meet maturities due in 1936 and 1938. It is obvious that no investor could feel confident that future Governments might not repudiate liability for interest payments or other conditions of the contract if it should suit their convenience to do so: he would therefore leave Newfoundland severely alone. In such circumstances, default on interest payments would inevitably result in an inability to redeem maturing loans, and any who may think lightly of the immediate effects of the former would do well to consider the consequences of a declaration of insolvency on this much larger scale.

Image description updated May, 2004.

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