512. We cannot indeed disguise from ourselves that default by Newfoundland, so far from providing a solution of the country's difficulties, would merely aggravate them. For any temporary relief which such a course might bring would be speedily counteracted by the destruction of the country's credit, and by the disastrous consequences which would inevitably follow from default on principal as well as on interest. Moreover, the situation in Newfoundland is already so grave that any further damage to the country's economic structure may lead swiftly to a financial collapse. For the Island to default on interest payments, if any other course is open to it, and risk the infliction of that damage, would be a suicidal policy.

  513. We have been content to dwell on the consequences of default to the Island itself and to pass over the effects which default by a part of the British Empire would be likely to produce on other parts of the Empire and even elsewhere. The people of Newfoundland would not, we are sure, be prepared to ignore this latter consideration as a matter of no concern to themselves. As we have said, default by a British community would be without precedent, and such a step would at once retard the general recovery and tarnish the good name of the British Commonwealth. Alike in its own interest and out of loyalty to the Commonwealth, the Island should take every possible step to avert so great a misfortune.

  514. There were certain witnesses who, while fully admitting that default by Newfoundland on the service of its public debt would be attended with the most serious consequences, suggested that these consequences might to some extent be mitigated if the Island were to adopt a scheme of currency inflation. These witnesses pointed out that Newfoundland's principal competitors in the European markets for salt cod-fish were Norway and Iceland, both countries with depreciated currencies; that it was the practice for Newfoundland fish to be sold in sterling; and that the depreciation of sterling since 1931 in terms of the Canadian dollar had acted as a 20 per cent. export tax on Newfoundland products. In this combination of circumstances the fishery had been conducted at a loss since 1931, with disastrous results both to the exporter and the fisherman. If, however, the currency of the Island could be divorced from the Canadian dollar and brought down at least to the same level as that of Newfoundland's foreign competitors, then, in the view of the witnesses, the fishery would receive a new stimulus, and would again become a source of profit to all concerned in it; improved conditions in the fishing industry would react on the other industries, there would be increased employment and the Island would be given a new opportunity of working out its own salvation. It was admitted that such measures could not save the Island from default; and indeed that the depreciation of the currency would make it all the more difficult for the country to meet its sterling and dollar obligations; but it was thought that if bondholders received payment in Newfoundland currency, even though such currency might have a greatly depreciated value for external purposes, this was as much as bondholders could reasonably expect in present conditions.

  515. These witnesses, in general, had no clear idea how such an inflation of the currency, now based on the Canadian dollar, could be brought about, or, if brought about, could be controlled. There were some, indeed, who seemed to envisage two kinds of legal tender current simultaneously in the Island, (1) the present note issue of the Canadian Banks, (2) notes to be issued by the Government with provision for redemption at a later period. It is obvious that these two kinds of notes would have different values, since the former are issued against a backing of gold and assets, whereas the latter would be issued with no other backing but the general revenues of the Island. Such a state of affairs could only give rise to confusion which would impair instead of stimulating the revival of trade. This would still be true even if, as some witnesses suggested, the people themselves were to be required to provide their own backing by the affixing of say a 3 cent stamp on each occasion that a note changed hands, the note being finally redeemed by the Government when the value of the stamps affixed were equivalent to the face value of the note.

  516. We need not perhaps dwell on the well-known dangers of such inflationary measures. It is hardly necessary to observe that such notes would not be accepted abroad or to point out the great extent to which the Island is dependent on imports from foreign countries for the necessaries of life. It is obvious that any impairment of confidence in the Island's currency might well lead to a breakdown in trade which could not fail to have the most serious and far-reaching consequences.

  517. There were other witnesses, particularly those concerned in trade with the United Kingdom, who, while eschewing a policy of inflation, put forward the view that the interests of the country would best be served if the Island were given a new currency based not on the Canadian dollar but on sterling. These witnesses envisaged a Newfoundland pound, linked to but not necessarily on a parity with sterling. The precise relationship of this pound to sterling would be a matter for scientific determination, but it was suggested that the example of New Zealand might be followed. A further suggestion which was sometimes made by witnesses was that an English Bank might be established in the Island.

  518. The approximation of the Canadian dollar to sterling during the last few moths has considerably eased the exchange difficulties of Newfoundland, and is partly responsible for the improved dollar prices received during the recent months by exporters, and paid by them to fishermen, for Newfoundland fish. On the other hand, the uncertainties of a fluctuating sterling exchange must prove a handicap not only to the country's primary industry, the products of which are sold almost entirely in sterling, but also to those sections of the newsprint and mineral industries which are either dependent on or looking for entry into the United Kingdom market. In these circumstances, it has been argued that, on a long-range view, it might well be that the country would gain from the substitution of sterling for the Canadian dollar as the basis of its currency. A decision, however, of such gravity and importance is not one which can be taken lightly. In no case could it provide a solution for the present emergency, since by no stretch of the imagination could it enable Newfoundland in any near future to meet from her own resources the interest charges on the public debt. The problem of avoiding default on these obligations, and the consequences which would inevitably flow from default, is the problem which claims priority over all others. When a solution has been found for that problem, it will be possible for the momentous question of a change of currency to be considered dispassionately and on strict merits, with the possibility also that by that time the future course of sterling may be more readily predictable.