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By the end of the first half of the nineteenth century the St. Lawrence canals had been completed and steamships were able to make return trips from Lake Ontario to Montreal. In turn, ocean steamships were able to proceed to Montreal. The St. Lawrence became the open gateway through which the industrialism of Great Britain made its impact on Canada. Railroad construction in Great Britain in the first half of the century accentuated industrialism and contributed to the growth of an international economy which involved dependence on new supplies of food, and raw materials, and on new markets for manufactured products. Railroad construction was accompanied by the emergence of free trade. Moreover, the narrowing of demand for railroad iron and railroad engineering technique in the home market led to the search for new markets on the continent and in North America. Investors, wearying of railroad speculation in Great Britain in the forties^[1] and of losses sustained in the South American republics, turned to the British Empire and found in the newly-established government of united Canada, with responsible government freshly achieved, strong support for security.

Lumber and wooden ships from Canada had practically completed their contributions in providing the framework for Britain’s industrial equipment in terms of transport, factories and industrial towns. Iron steamships and the railroad began to bring wheat to the increasing industrial population of Great Britain. Wheat, iron and the new steel, and coal displaced lumber and wooden sailing ships. In the growth of an international economy in Great Britain, based on iron and steel, wheat became a foodstuff of dominant importance.

The transition from lumber and wooden sailing vessels to wheat and iron steamships and railroads is the key to the troubled economic development of the period after 1850. Whereas lumber and wooden ships had been direct contributions from Canada, wheat involved the use of steamships and the importation of iron from Great Britain. Wooden ships and lumber capitalized the advantages of the St. Lawrence and Canadian natural resources, while steam and iron involved imports of coal and capital equipment. The shipbuilding industry suffered devastating losses. The immigration of population and the importation of capital which accompanied the construction of railroads and the expansion of wheat production in Ontario brought heavy strains on an economy largely dominated by wood and water and winds.

The importance of the St. Lawrence waterways to the economic development of Canada from the standpoint of her relations with Great Britain, especially in the production of staples and in the impact of industrialism, involved serious problems of finance. Completion of the St. Lawrence canals necessitated the financial support of government, and implied Lord Durham’s report and the Union of 1840. Political organization and, in turn, responsible government were prerequisite to the financing of improvements of navigation on the St. Lawrence. Financial support was necessary for railroads intended to supplement and strengthen the position of the St. Lawrence by giving access to the sea in winter months, as in the case of the Grand Trunk to Portland and the Intercolonial to Halifax, and by overcoming obstacles, as in the case of the portage lines between the lakes. The financial support provided by the government for the improvement of the St. Lawrence by canals and railroads involved heavy debts without adequate methods of payment, particularly as a result of heavy depreciation through obsolescence following the improvements of alternative routes by the Erie Canal and railroads to New York. The deficits incidental to the enormous costs which followed the decline of a wood and water economy and the introduction of iron and steam, to the competitive weakness of the St. Lawrence, to the fluctuations in demand for the staple products wheat and lumber, and to competition from the industrialism of the United States which followed the Civil War, necessitated attempts to increase traffic by the St. Lawrence, to increase revenue from this traffic and to build up new markets in the Maritimes and in Western Canada. The rise of a protectionist policy, especially during periods of depression, was in part an attempt to check obsolescence through competition by dumping from more highly industrialized countries, in part an attempt to maintain the local market, and in part a direct result of the influence of the St. Lawrence and its demands for revenue to meet interest on improvements in navigation, and for a wider area from which to draw exports of raw materials. Confederation and the possibilities of wider credit were linked to the demands of the St. Lawrence and the new industrialism. The emergence of Canada as a modern state is inevitably a part of the spread of industrialism and capitalism. Confederation became an effective credit institution with the demands for long-term securities which accompanied the spread of industrialism especially as shown in transportation. The rise of Canada was in a sense a result of the demand for adequate imperial cost accounting which arose with Gladstonian liberalism. The implication of Galt’s statement regarding the difficulties of 1849, following the repeal of the corn laws and the navigation acts, that “under such depressing circumstances the only hope lay in the fact that people had at last the management of their own affairs,” was shown in the right to borrow on our own account and the right to pay our own debts. Responsible government provided the financial support for the spread of industrialism essential to the shift from lumber to wheat.

Extension of control from the St. Lawrence basin involved the territory politically dependent on the St. Lawrence as a result of the fur trade. The northern Precambrian, forested, fur-producing area and the agricultural area immediately to the south which supported the fur trade, and the Pacific coast basin, formerly linked under the North-West Company to the St. Lawrence drainage basin, were reclaimed from control of the Hudson’s Bay Company through Hudson Bay after 1821. The economic developments of relatively isolated drainage basins were united by the railroad, and the unity based on the St. Lawrence, which had been destroyed after 1821 by the supremacy of the Hudson Bay route, was restored. Construction through the Precambrian area involved non-remunerative territory and was supported by traffic from the agricultural area. The agricultural territory, which was formerly subsidiary to the fur-trade territory, became the basic territory for the railroad and wheat. Confederation supported the railroad to the Pacific with subsidies of money and land and stretches of finished line.

The completion of the Canadian Pacific Railway in 1885 extended the base line of modern industrialism along the southern edge of Canada from the St. Lawrence basin. The outstanding characteristic of the period was a gradual strengthening of the position of the St. Lawrence drainage basin by the addition of railways and the application of steam to transportation and navigation.

The revolution in agriculture, especially in the production of wheat in Ontario which followed the railways, provided an economic structure including industry, financial organization, distributing systems and public financial policy, which served as the basis for the development of wheat production in Western Canada after the completion of the Canadian Pacific Railway. Improvements in transportation and communication hastened the development of trade and in turn the decline of barter. The gradual disappearance of illiteracy contributed to the spread of a money economy. Wheat production involved the development of a wealth of secondary industries based on the varied resources of the St. Lawrence basin. The economic framework developed in relation to wheat in Ontario was the basis for the expansion of wheat production in Western Canada. The period from 1850 to 1885 in Ontario was crucial to the period from 1885 to 1914 in Western Canada. The Intercolonial opened new markets in the Maritimes and the Canadian Pacific new producing areas in Western Canada.

As a result of industrialism and its effects on the St. Lawrence, Canada shifted to wheat and became an integral part of the raw material producing areas of the world and especially of the British Empire to supply the increasing industrial population of Great Britain. Production of staples which followed the importance of water transportation involved the shipment of wheat and in turn of the products of mixed farming. In the Maritime Provinces more effective competition in markets dominated by water transportation accentuated the trend toward specialized production. The decline of shipbuilding was offset in part by coal-mining, but this in turn supported more effective competition from goods brought from the St. Lawrence by water and rail. The difficulties of the Maritimes which followed more direct competition between rail and water transportation were to some extent the opportunities of the St. Lawrence basin with its greater diversification in agriculture and industry. The economy of the St. Lawrence, based on wheat, had far-reaching effects on agriculture, industry and finance in the Maritimes. The latter were more exposed to the effects of industrialism applied to water transportation, and suffered accordingly. Recovery through specialization to take advantage of new markets provided by improved transportation was slow. Steam navigation and transportation had more devastating effects on the Maritimes than on Upper Canada, and such alternatives as wheat were not in evidence. Railroads were more serious for the Maritimes than for Upper Canada, as a result of the relatively greater importance of wooden shipbuilding.

Confederation as a credit institution was largely a result of the demand for long-term securities to finance improvements in transportation in relation to the St. Lawrence drainage basin. It was further an accumulation of debt which followed the devastating effects of industrialism in isolated areas. Severe fluctuations were conspicuous and a result of different factors in isolated areas. The depression of 1857 in the St. Lawrence drainage basin, for example, was paralleled by rapid expansion on the Pacific. Nor were the difficulties of the St. Lawrence in the fifties and sixties evident in the Maritimes. Rapid exploitation of natural resources characteristic of placer mining involved a government deficit in spite of the application by Douglas of the accounting technique of the Hudson’s Bay Company to government projects. The deficit contributed by the expansion and rapid decline of the gold rush was assumed by the Dominion. In the Maritimes Confederation avoided in part the effects of the decline of wooden shipbuilding, but railroads continued to register deficits. In the St. Lawrence competition from the New York route had serious effects on government finance. Confederation became in part a buffer to modern industrialism and the reservoir of debts accumulated as a result of the difficulties of communities faced with the effects of rapid changes in mechanized transport and of the exhaustion of natural resources.

The effects of increasing debt and of deficits have been indicated in the emergence and expansion of the political unit under Confederation. The problem was deep-seated. The importation of capital in the construction of railroads and canals was accompanied by a period of prosperity.^[2] Depression abroad and the restriction of capital imports, the length of time necessary for traffic to develop on expensive through-line routes, low prices for basic export staples, wheat and especially lumber, depreciation of capital based on water routes as a result of effective rail competition, contributed to the difficulties which followed prosperity. More efficient transportation for imports, gradual increase in traffic on the railroads and canals, tariffs to increase revenue and to protect industries exposed to competition through lower costs of transport, higher prices for export staples abroad, and attempts to encourage further capital imports contributed to the movement toward prosperity. Increasing efficiency of the industrial equipment of more highly industrialized countries involved, for example, the lowering of the price of steel rails from £23 per ton in 1861 to £12 in 1870 and signing of the first contract for the importation of American rails for the Canadian Pacific Railway at $28.50 a ton in 1884. Assuming government subsidies to equal roughly the cost of rails, the incentive to encourage capital imports was overwhelming, especially with lower prices during the depression, and with prospects of increased economic activity, increased traffic, and increased revenue. The effects of changes from periods of prosperity to periods of depression, and in turn to periods of prosperity, were accentuated by the effects of the industrial revolution which followed mechanical transport. The net results were evident, in the difficulty of adjusting expenditures to receipts especially as dependent on imports, in checking the effects of increasing competition, through improved transportation and increasing efficiency,^[3] on industries established during a period of prosperity, in a period of depression and possibly in encouraging new industries by more aggressive protection, and in meeting the interest on loans made during a period of prosperity. Low rates of interest during a period of depression and recurring deficits stimulated renewed activity in borrowing and in encouraging further construction. Deficits increased during a period of depression and borrowings during a period of prosperity. Throughout the period government debts increased and, in turn, tariffs and capital equipment. The completion of the Canadian Pacific Railway marked the end of the first stage, but the trend continued. The opening up of natural resources and lowering of cost of production by improved transportation offset in part the effects of increased debt, and with completion of the Canadian Pacific Railway vast new areas of wheat-producing lands were made available. The fathers of Confederation builded other than they knew.

[1]	See L. H. Jenks, Migration of British Capital to 1875 (New York, 1927).

[2]	See K. W. Taylor, “Statistics of Foreign Trade,” Statistical Contributions to Canadian Economic History, Vol. II (Toronto, 1931), passim.

[3]	See Memorandum to Royal Commission on the depression of trade and industry, Official Papers of Alfred Marshall (London, 1926), pp. 4-5.