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Confederation and the Economics of the Railway

In celebration of Canada’s 150th anniversary, we journey back to the years surrounding 1867 to explore the country’s economic development…
“There was a time in this fair land when the railroad did not run…” So begins Gordon Lightfoot’s 1967 Canadian Railroad Trilogy, an ode to the vision that saw “an iron road runnin’ from the sea to the sea,” the very road upon which Confederation was founded and which became the driving force in the Canadian economy.

Actually, railroads did exist in the British North American colonies prior to 1867, but only in bits and pieces. Nova Scotia had constructed a line linking Halifax with Truro on the Bay of Fundy; New Brunswick had a rail connection from Saint John to the Gulf of St. Laurence by a line that ran through Moncton to Shediac; while in central Canada, the Grand Trunk line extended from Sarnia on the Detroit River to Rivière du Loup, 125 miles east of Quebec City.

But between Rivière du Loup and Truro there was a five-hundred mile gap, a gap that would have to be filled as a condition of New Brunswick’s and Nova Scotia’s agreement to join with the colonies of Upper and Lower Canada, which had formed a union in 1840.

Likewise, British Columbians wanted the enormous gap filled between themselves and Sarnia, where the Grand Trunk line ended, and made it a condition of joining Confederation – although in truth, they were in no position to bargain. Their prosperity had been based on gold but by 1866 the heyday of mining was over. With agriculture and industry practically non-existent, the burden of debt was heavy. Teetering on the brink of bankruptcy, their only other alternative was annexation with the United States, which would have meant American domination of the Pacific Coast.

Older than any of these colonies was the Hudson’s Bay Company, an economic entity which came into existence for the sole purpose of engaging in the lucrative fur trade with England and Europe. The company received its charter in London on May 2, 1670 which granted it monopoly of all trade in furs, leather and dressed skins through Hudson Strait together with exclusive possession of all the lands within the drainage basin of the Bay. Named Rupert’s Land, in honour of its first governor, Prince Rupert of the Rhine and a cousin of Charles II, it included the greater part of the prairies as well as the tundra to the north.

Settlement was never on the company’s agenda. When Lord Selkirk was granted the right in 1811 to found a settlement at Red River, company officers were decidedly unfriendly. But by 1835 they grudgingly recognized that their fur-trading operations were significantly dependent on the settlement as a source of labour and agricultural supplies. At the same time, they strenuously objected to the Red River settlers engaging in private fur trade at American posts which brought them higher prices than what they received at posts of the Hudson’s Bay Company.

Not only was the company opposed to small settlements, it was opposed to the building of a trans-continental railroad, which would open the door to large-scale settlement based on agriculture, placing the lucrative fur trade in jeopardy.

So although east-west trade was hampered, such was not the case with north-south or trans-Atlantic routes. In 1843, for example, the American Fur Company, with posts in Pembina and Grand Forks (North Dakota) established a line of carts between Pembina and St. Paul (Minnesota) on the Mississippi to handle the Red River trade. By the end of the 1840s this transport system was carrying furs valued at $20,000 annually.

In the east there was one north-south rail line, the Grand Trunk, running from Richmond to Portland, Maine, giving Central Canada access to trade along the Atlantic seaboard. But the most important trade routes of all began in the ports of New Brunswick and Nova Scotia which had emerged as economic powerhouses, a result of their trans-Atlantic trade with England, Europe and the West Indies and coastal trade with the United States.

Beginning in 1815, the wooden shipbuilding industry had enjoyed spectacular growth with towns like Lunenburg, Yarmouth and Pictou in Nova Scotia and Saint John and St. Martin’s in New Brunswick producing clippers, barques and brigantines which sailed the seven seas, as well as the hardworking schooners that plied the waters of the Gulf of Maine, docking at Boston, New York and Philadelphia.

Their trade was mainly in square timber, salt cod and the ships themselves, many of which were built for foreign owners. And there was one other, now long-forgotten commodity: high quality grindstones from the Bay of Fundy. For a brief period they made a few Maritimers very wealthy; but more importantly, they allowed the American industrial revolution to move forward while Canada remained a staples-based economy. Without a readily available supply of superior quality grindstones, industry in the US would have been hard-pressed to succeed, as they were essential for the manufacture of hard-edged precision tools.

By the middle of the nineteenth century, the Canadian colonies on the St. Lawrence had laid the foundations of a unified commercial economy, based on the exploitation of timber resources, the production of wheat, the construction of a system of inland waterways, beginning with the Welland Canal, and the development of an elaborate network of credit centred on Montreal, the point where the commerce of the interior and of the North Atlantic met.

Those economic policy makers, however, failed to consider the implications of having their port on the St. Lawrence River frozen for months at a time. Neither did they foresee that favourable trade relationships are subject to change, which is what occurred when England repealed the Corn Laws and made a reduction in the preferences on timber, both of which dealt the fledgling economy painful blows.

Meanwhile, the American economy was moving full steam ahead, with the industrial north leading the way. Favoured by geography, their ice-free ports on the Atlantic and inland waterways allowed for year-round transportation and export of manufactured goods. Furthermore, they had sufficient capital to begin construction on a transcontinental railroad, which would reach its western terminus in San Francisco in 1869. Added to that was a steadily growing population, which in the 1860s numbered approximately 30 million, in stark contrast to the population of the British colonies whose total population was less than four million.

Clearly the colonies, especially the Canadas, were lagging behind. Faced with the choice of annexation or Confederation, their representatives crashed an 1864 meeting in Charlottetown, Prince Edward Island which had convened to discuss Maritime union. Instead they offered a counter proposal of Confederation, which resulted in 1867 in the formation of a new nation, consisting of four provinces: New Brunswick, Nova Scotia, Ontario and Quebec (formerly Upper and Lower Canada).

But this was just the first step toward realizing the nation-building dream of a dominion stretching from sea to sea. First, Rupert’s Land had to be purchased by the federal government from the Hudson’s Bay Company in 1869. This was followed by British Columbia’s admission to Confederation in 1870, with Prince Edward Island joining in 1873. Political union, however, stood little chance of survival unless it was complemented by economic union. Tariffs between the provinces needed to be abolished, while tariffs between them and the outside world needed to be interposed. But the most crucial consideration was completion of the trans-continental railroad.

The Intercolonial Railway, connecting Rivière du Loup with Truro, was completed in 1876, financed by the Canadian government at a cost of $34,363,896. Although the cost was high, so were the standards of construction throughout, with steel rails used instead of iron and iron bridges instead of wood. But while steel guaranteed the longevity of the rails, its use for rail lines sounded the death knell for the Maritime shipbuilding industry because it was in those years that shipyards in the United States and England began building steel-hulled, steam-powered ships, vessels against which the Maritime’s wooden wind-powered ones could not compete. As a result the shipbuilding industry collapsed and by the 1880s the Maritimes, once economically superior to central Canada, had fallen into depression.

Eleven years after the Intercolonial Railway was completed, the Canadian Pacific Railway, which involved near-unimaginable feats of engineering construction through the rock and muskeg of the Canadian Shield and the mountains of British Columbia, was completed, with the ‘last spike’ triumphantly driven on November 7, 1885 at Craigellachie in Eagle Pass, British Columbia.

As might have been expected, the cost to the federal government of building the railroad, even through a private-public partnership, was high. The government provided $25 M in cash, 25 million acres of land which the CPR sold to settlers, paid $37 M to cover the surveys, and guaranteed the CPR’s monopoly over transportation south to the US for 20 years. Due to cost overruns, the CPR received an additional $22.5 M in loans under the Railway Relief Act of 1884, which became a contentious issue.

The CPR did, however, live up to expectations in terms of economic development and communication. Even before it was completed, it was accepting commercial telegraph messages and opening the west to settlement and agriculture resulting in the large scale production of wheat.

Upon completion, the railway promoted trade in the Pacific with the purchase of three ocean passenger-cargo vessels and constructed a line of fine hotels. Further rail construction involved branch lines throughout the west to feed into the main east-west line and expansion into the Kootenay mining region of southern British Columbia that formed the nucleus of the province’s involvement in mining and metallurgy.

It’s no surprise then that the national mood was optimistic, with Prime Minister Wilfred Laurier boldly claiming that he 20th century would belong to Canada. While his words were perhaps more prophetic for his neighbour to the south, there was no doubt that Canada was poised to move forward.



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