Canadian Transport Sourcebook

Chapter XVIII

Government Ownership of Railways in Canada

In order that we may be able to understand the circumstances in connection with the taking over, in recent years, of a large amount of railway mileage which was formerly in the control of private corporations, it is necessary for us to outline briefly some facts concerning the earlier history of these corporations.

The Canadian Northern: Historical background.—The system which was later known as the Canadian Northern Railway System began with the acquisition by Messrs. Mackenzie and Mann, in 1896, of the Manitoba charter granted in 1889 to the Lake Manitoba Railway and Canal Company. The charter was for a line 123 miles long from Gladstone, Man., on the Canadian Pacific Railway, to Winnipegosis. This line was opened in January, 1897. In the same year (1897) these men began to construct the Manitoba and South-Eastern Railway from Winnipeg to Port Arthur. Soon after they built the Winnipeg and Great Northern. These three companies received land grants of 4,000,000 acres, and their bonds were largely guaranteed by the Province of Manitoba. In 1899 the Lake Manitoba Railway and Canal Company and the Winnipeg and Great Northern Railway Company were amalgamated as the Canadian Northern Railway Company. After this, by leases, absorptions, and new construction, the Canadian Northern grew rapidly both eastward and westward. The companies were held together loosely by stock ownership and all the common stock of the Canadian Northern Railway Company was held by Messrs. Mackenzie and Mann.

Four different methods of financing were employed by this company. At first it relied on provincial guarantees and with this assistance it constructed or otherwise secured control of an important network of lines in the three Prairie Provinces. In these provinces it was a successful company and had access to the chief centres of traffic. Soon its prosperity induced it, in order to become most successful, to seek access to an important port on the Pacific and to the chief commercial cities of the East. In this second stage it obtained aid from the Dominion. Then, when it had become better known, it raised large amounts by the issue of perpetual debenture stock and convertible income debenture stock, all upon its own credit. At no time was any cash obtained by the sale of its own common stock or of that of its subsidiary companies. Nearly all its money was raised in London. At this time it had entered upon the ambitious scheme of becoming a second transcontinental lien, by constructing through British Columbia to Vancouver and by building from Winnipeg eastward to Montreal, with suitable terminals for the growing traffic. In 1913 the federal government granted the company a subsidy in aid of its project. In 1914 the company came to its fourth stage in financing. With heavy interest payments to meet and in need of a large amount of capital with which to complete its lines and its costly terminals, the company found its own resources inadequate and presented its case to the Dominion government, asking the latter to guarantee the company's bonds. The company stated that $100,000,000 would finish and equip the system; that it could furnish on its own credit $58,000,000, and wanted the government by a bond guarantee to make it possible to get the remainder. The government acceded and guaranteed an issue of $45,000,000 of 4% first-mortgage debenture stock. The total proceeds from the company's financing on this basis were $36,759,265. In return for guaranteeing this issue of securities the government received $40,000,000 of the company's common stock and was given the right to appoint one of its directors. The company's assurance that the returns from the sale of these bonds, together with the funds which it could procure on its own account would be sufficient to complete the enterprise proved to be an error of judgment. The stringency in the money market due to the outbreak of the war, and the fact that the company had gone ahead too fast and had undertaken expensive schemes which could not possibly carry themselves from the outset, made the company's position very uncertain. The lines in the West were not furnishing a sufficient surplus to carry the later extension during the construction period.

With insufficient funds, and the money markets of the world practically closed to the issue of permanent securities other than government loans, the company, in May, 1916, obtained from the government a further loan of $15,000,000 at 6%, which could be used either for construction or for the payment of interest on its securities. In addition, the government, in September, 1915, had lent the company the money necessary to pay interest on the $45,000,000 debentures. In 1916, then, the company had an uncompleted line in British Columbia and in Ontario, and the Montreal terminal involved a serious commitment. The chief cause of this company's difficulty, as we have said, was its too rapid expansion in the face of the inadequate earning power of those lines which were in operation and were showing profits.

The Grand Trunk and Grand Trunk Pacific.—The position of the Grand Trunk and its subsidiary, the Grand Trunk Pacific, must also be considered. The former was the first important railway in Canada, and it had grown until it had a good system of lines and facilities in the older part of the Dominion (Ontario and Quebec) and some useful subsidiaries in the United States. Its through line from Portland, Maine, to Chicago enjoyed a heavy traffic. But up to 1902 it had no means of tapping the growing traffic of the Prairie Provinces, which were proving fruitful territory for the Canadian Pacific and the Canadian Northern Railways. In 1902 the late Charles M. Hays, then President of the Grand Trunk Railway, stated that two things were necessary if that road were to be in a position to compete successfully with its rival the Canadian Pacific Railway: first, the head office must be move3d from London to Canada and the board of directors should be residents here; and, second, the company must secure the benefit of the long haul upon tonnage originating on their lines and consigned to the far West, and, at the same time, the benefit of the long haul upon tonnage originating in the far West and consigned to points on the company's lines in the East.

With these objects in view he proposed to secure a charter for a railway, to be called the Grand Trunk Pacific Railway, from North Bay westward to the Pacific coast and to have the Grand Trunk lines as the eastward extension of this through route. The Grand Trunk Pacific Railway Company was to have a Canadian board of directors and its head office was to be in Canada. It was to be the operating company for the entire system and was either to lease or purchase the Grand Trunk lines in eastern Canada. These plans failed to materialize. The government was unwilling to recommend the granting of the charter under these conditions for a line from North Bay to the Pacific coast.

Negotiations followed, during which the then Prime Minister, Sir Wilfrid Laurier, brought Mr. William Mackenzie, the head of the Canadian Northern Railway lines in the West, and Mr. Charles M. Hays together for the purpose of effecting a fusion of interests, either by purchase or agreement, of the Grand Trunk Pacific and the Canadian Northern lines, the object being to have the union of these two lines in the East and the West operating as a through route and thus avoid the building of another line (the Grand Trunk Pacific) as had been contemplated. These negotiations came to naught; neither party would accept the terms of the other. The Canadian Northern undertook to build its own connections to Atlantic and Pacific ports and the Grand Trunk sought a charter from Parliament for the construction of its western connection.

The government, however, had a more ambitious plan for the Grand Trunk, and in the conferences between the Grand Trunk officials and the government arrangements were finally completed, with the unwilling assent of the former, for another transcontinental line from Moncton, N.B., to Prince Rupert, on the Pacific coast. The Dominion government was to construct the eastern division of this through route, the National Transcontinental Railway, from Moncton, through northern Quebec and Ontario, to Winnipeg; and the Grand Trunk Pacific Railway Company, with large governmental assistance, was to build the remainder of the line from Winnipeg to Prince Rupert. Then, on the completion of the latter, the Grand Trunk Pacific was to take over the operation of the eastern division, free for the first seven years and subsequently at an annual rental equal to 3% of its cost of construction. The estimated cost of this eastern section was $61,415,000, but when its actual cost reached $159,881,197 the Grand Trunk Pacific refused to operate the road, and the government, by accepting the company's refusal and commencing to work the line itself, in effect released the company unconditionally and added the National Transcontinental to the other governmental railways, of which the Intercolonial was the backbone.

But the Grand Trunk Pacific had its own difficulties, both of construction and operation. Much larger amounts had to be paid for rails, rolling stock, wages, etc., than were contemplated, and as the road was being built at a time of rising prices and wages the high cost of construction involved the undue expansion of the capital account. Instead of building a road with all the elements of permanence and durability, such as characterize the roads in the older settled sections of the country, it would have been the part of wisdom to build a less costly and less permanent roadway, which would have been sufficient for the existing volume of traffic and which could have been changed and improved as future developments might warrant. In this way the United States transcontinental railways had been constructed. The road was defective also in having few feeders or branches; and to put through one main line of road in a sparsely settled territory, and not provide lateral lines to reach out into those sections where traffic was abundant and draw business to the main line, was to furnish conditions which would certainly lead to financial distress. In addition to these difficulties the Grand Trunk Pacific had to meet the competition of the Canadian Pacific and the Canadian Northern, two roads which were already operating profitably before the new line was authorized and which were in a position at all the important points to render better service than the newcomer.¹

The finances of the Grand Trunk Pacific and its branch lines show that, on December 31, 1918, these lines had a funded debt of $216,253,111, upon which there was an annual interest charge of $8,456,408. Of this debt, the parent company was the guarantor to the extent of $97,301,253, the Dominion government to the extent of $76,574,181, and the provincial governments of Alberta and Saskatchewan to the amount of $16,786,440.² The remainder of the debt, $25,197,237, consisted of advances or loans made by the Dominion government to the company at different times, particularly to pay interest on its bonded debt. In addition to this funded debt the Grand Trunk Railway Company, on February 29, 1916, had made advances to the Grand Trunk Pacific subsidiaries to the amount of $26,179,728, for which it held the notes of these companies to the amount of $24,334,016.³ It will be seen from these figures that the total commitment of the Grand Trunk Railway Company for the Grand Trunk Pacific and its subsidiaries was $123,280,980.³

The operating results of the Grand Trunk Pacific were very unfortunate, for, including taxes and rents payable, interest on funded debt, and all other charges, it had a deficit in 1917, 1918, and 1919 of $5,707,581, $7,389,568, and $10,316,379 respectively, and its operating ratio was about 105.⁴ Year after year, the Grand Trunk Railway Company was unable to come to the aid of the Grand Trunk Pacific and meet its deficits and government made annual contributions for this purpose. In 1916, for example, the government set aside $8,000,000 in the estimates for Grand Trunk Pacific account, and again in each of the years 1917 and 1918 the government placed $7,500,000 in the estimates for the same purpose.⁵ This policy of spoon-feeding a private railway out of funds raised by taxation of the people could not continue.

The circumstances of the parent Grand Trunk Railway Company also had been very unsatisfactory. Out of its operating earnings and other income, it had always been able to pay its expenses of operation, fixed charges, rentals, and deficits of its United States subsidiaries, and in the decade ending 1916 it paid dividends which averaged $3,600,000 per annum. But its dividend policy was very uncertain. The 4% dividend, or an approximation to it, on the guaranteed stock was paid until 1916; the 5% dividend on the first and second preference stock and the 4% on the third preference stock were paid intermittently up to 1917, but after that time no dividends were paid on either the guaranteed or the preference stocks and nothing has ever been paid on the common stock.⁶ According to the report of the Railway Inquiry Commission a large part of the amounts paid in dividends should have gone into the improvement and upkeep of the roadway and equipment, and because this was not done there was a gradual deterioration of the property and the capital.⁷ The directorate in London, however, emphatically denied this.⁸

After the government had released the Grand Trunk Pacific from its contract to operate the National Transcontinental, the President of the Grand Trunk Railway Company, on December 10, 1915, wrote to the Prime Minister acknowledging that the company could not fulfil its obligations with regard to the Grand Trunk Pacific, and asking that, in return for the company's handing over to the government the $25,000,000 of Grand Trunk Pacific common stock, for which the Grand Trunk Railway Company had paid but a nominal amount of cash, the government would not only relieve the company of all liability for the fixed charges and operating deficits of the Grand Trunk Pacific, but would pay back to the Grand Trunk Railway Company any money which it had advanced to the Grand Trunk Pacific and its subsidiaries. The reasons given by the Grand Trunk for this course were, first, that when the company signed the agreement with the government in 1903 it was understood that the Grand Trunk Pacific Railway was largely a national undertaking in which the government and the railway company were practically partners, but that since that the time the government's granting aid to the Canadian Northern, a competitor of the Grand Trunk Pacific, amounted to a virtual retirement from its partnership from the latter; second, that the construction of the Canadian Northern in the same territory at the same time increased the difficulty of securing labour, doubled the wages, and prolonged the period of construction; third, that the new duty on steel rails was imposed after the Grand Trunk Pacific was chartered and this added $5,000,000 to the cost of construction. A non-partisan examination was made of these claims and the conclusion, reached was that the company had taken its risks, that its understanding as to partnership with the government was not justified, that the government had given much assistance beyond what the contract specified, and that the company had no claims against the government.⁹ Whatever were the merits of the case, the Grand Trunk was not able to meet its obligations respecting the Grand Trunk Pacific and the government for several years furnished the funds with which to keep the road in operation and satisfy all claims.

With these difficulties in regard to three railway systems pressing upon the government, the latter appointed in 1916 a Railway Inquiry Commission to investigate the railway problem and advise the government as to what course should be pursued. This commission was composed of Sir Henry Drayton, then Chief Commissioner of the Board of Railway Commissioners for Canada; Mr. William Acworth, a noted English authority upon railways; and President A. H. Smith, of the New York Central System. After careful inquiry of the whole issue, the commission agreed that the Canadian Pacific should be left as it was; it was prosperous and was a great asset to the country. But in the matter of a remedy for the difficulties of the other lines, which were said to have "broken down", the two first named members of the commission handed in a majority report and the latter a minority report, the recommendations of which were entirely different. The two commissioners saw no way to organize these companies anew under private control, and, consequently, they recommended that a board of trustees be constituted by Act of Parliament and incorporated as "the Dominion Railway Company", and that the ownership of the three financially embarrassed companies should be vested in this company.¹⁰

They found that the shareholders of the Canadian Northern had no equity in that property; that the people of Canada had found or assumed responsibility of the bulk of the capital, and would have to meet operating deficits and find what further capital was needed; and, therefore, the people should assume control of the property. The financial condition of the Grand Trunk and of the Grand Trunk Pacific was such that these two lines also should be surrendered into the hands of the people of Canada, who really owned them because of financial assistance given to them. As the owner of these three properties, then, the government should hand them over to the proposed Dominion Railway Company for operation, since government operation was not satisfactory. The Intercolonial and the National Transcontinental should also be placed under the same control, and all five should be merged and operated as one united group. The board of trustees appointed by the government to administer these railways should be a "permanent, self-perpetuating body" and "should not assume, or even be suspected of assuming, a political complexion."¹¹ To this the commissioners attached "extreme importance", so that the board might not be hampered in any way by political considerations. The Dominion Railway Company should be subjected to the jurisdiction of the Board of Railway Commissioners to the same extent as any private railway company.

The minority report, which in so many instances comes nearer to the finality of the problem, was dismissed with almost no consideration. And yet it was a valuable contribution and vitally pertinent to a proper solution of the difficulty. In essence, it pointed out a way by which the roads could be preserved under private ownership and operation, whereas the majority report recommended government ownership, but not government operation. Government aid would be necessary under any plan that could be devised, but President Smith's plan was to group the lines in such a way as to obtain the greatest economy of operation, under private ownership, and with the least amount of government aid.¹² For obvious reasons, government financing of private railways had not much attraction for the ordinary citizen at that time.

Acquisition of the Canadian Northern.—Instead of following either the majority or the minority report, the government set aside both. In the session of 1917 a Bill was brought into Parliament by the Minister of Finance providing for the acquisition of the Canadian Northern, but leaving the other lines in statu quo.¹³ The Grand Trunk Pacific was given a loan of $7,500,000 to enable it to carry on its service and meet its fixed charges for the year, and in 1918 a similar amount was advanced by the government for the same purpose. It is difficult to understand the reason why the Canadian Northern should have been acquired immediately, and the other two lines left as they were for two years—that is, it is difficult to understand it from the facts as brought out in the House, for much information which should have been given was insistently refused by the government. Although the majority report of 1917 had said that the stockholders of the Canadian Northern had no equity in the property, the Minister of Finance stated that there were certain assets which had not been accounted for in that report, and in bringing in the Bill for taking over that railway the government's proposal was that it should acquire not the property but the remainder of the company's common stock, amounting nominally to $60,000,000. Moreover, the valuation of this common stock was to be determined by a board of arbitration. Why should this method be restored when it had been abandoned long ago and all similar valuations had been determined by the Exchequer Court? The only answer given by the government was that it was the method recommended in the Drayton-Acworth (majority) report; but a careful reading of that report shows that this was erroneous.¹⁴ To show how little confidence the government had in arbitration as a means of fixing a fair valuation of the stock, it is only necessary to remark that the government fixed the maximum amount which it would pay at $10,000,000. The board of arbitration stated, without giving any reason therefor, that they valued the stock at $10,800,000. There are many loose ends in this whole transaction which have never been made public; but it is well known that one of the banks, with which the Minister of Finance was connected, which had made large loans to the Canadian Northern Railway Company, would have lost heavily had not the government taken over the road. This railway system passed into the hands of the government on October 1, 1917; the former operating staff was maintained but a new board of directors was appointed by the government.

Negotiations for the acquisition of the Grand Trunk.—On January 24, 1918, the government entered into communication with Mr. Alfred Smithers, Chairman of the Grand Trunk Railway Company directorate in London, with the object of finding upon what terms it could obtain possession of this railway system, including the Grand Trunk Pacific and its subsidiaries.¹⁵ The board of directors, in view of the future possibilities of the railway system in such a rich country as Canada, offered to hand over the entire organization upon condition that the government assume all the obligations of the Grand Trunk Railway Company and contribute annually from January 1, 1917, £1,084,200, which would pay the dividends on the guaranteed and preference stocks. In addition, the government should pay on the common stock 1% from January 1, 1920, 2% from January 1, 1925, and 2½% from January 1, 1930. This offer was not acceptable and on March 5, 1918, the government sent a counter-proposal, offering in accordance with the Drayton-Acworth report to take over the assets and assume the obligations of the Grand Trunk and Grand Trunk Pacific and to pay annually to the Grand Trunk Railway Company $2,500,000 for the first three years, $3,000,000 per year for the next five years, and $3,600,000 annually thereafter. These sums might be distributed by the Grand Trunk management as they might determine among the holders of the guaranteed, preference, and common stocks. In lieu of these amounts, the government offered to leave the terms to be determined by arbitration. In the summer of that year these terms were renewed, with the addition that if the Grand Trunk Railway Company should accept the alternative to have the question of renumeration determined by a board of arbitration the guaranteed stock, if the company so wished, might be treated as an obligation of the same nature as the company's debentures.

Negotiations continued intermittently. The financial embarrassment of the Grand Trunk Pacific was becoming more pronounced. The government refused to provide any more funds for this road while negotiations remained in the existing unsatisfactory condition. The Grand Trunk Pacific notified the government that it would be unable to continue operation beyond March 10, 1919, and on March 7, 1919, the Minister of Railways and Canals was appointed receiver of this road. The position of the Grand Trunk Railway Company, divested of immediate responsibility for the Grand Trunk Pacific, was not so critical, and it was not till about September 1 of that year that the company renewed negotiations in a more hopeful form. Finally, On October 10, 1919, after the Grand Trunk directors had reached a substantial agreement with the government and had accepted arbitration as the means of determining the payment to be made, the Bill for the acquisition of the Grand Trunk Railway System was brought into the House.

Terms of the acquisition of the Grand Trunk Railway System.—The most important provisions of this measure were,¹⁶ first, that the government would guarantee the payment of dividends upon the 4% guaranteed stock, amounting to £12,500,000, and leave this stock in the hands of its private owners. This would make the stock practically equivalent to a government bond bearing 4% interest. Second, the value, if any, of the three preference stocks and the common stock, amounting to £49,573,492 should be determined by a board of three arbitrators, one of whom should be appointed to represent the government and one to represent the Grand Trunk, with a third as chairman of the board. When these stocks should be valued by the arbitrators, they should be transferred to the government, and in lieu thereof "new guaranteed stock" bearing 4% interest, guaranteed by the government, should be issued to the holders, in such proportions as the arbitrators should determine. All voting power should be taken from both the existing guaranteed stock and the "new guaranteed stock" and provision was made that either of these might be called in or redeemed by the government at par at any time after 30 years following the taking over of the road. Third, the present debenture stocks (comparable with bonds) should be continued and all payments of interest should be guaranteed by the government. The voting power of this stock also, like that of the other stocks, must cease absolutely as soon as the government guaranteed the payment of dividends and interest. Fourth, provision was made that as soon as the agreement had been ratified by a majority of the stockholders of the Grand Trunk at a meeting specially called for that purpose, there should be the appointment of a Committee of Management to insure the operation of the Grand Trunk Railway System, including the Grand Trunk Pacific, in harmony with the Canadian National Railways. Then, when the preference and common stocks should be transferred to the government, the Grand Trunk System should come under the same management as the Canadian National Railways.

This is not the place to show the circumstances in which this transaction was completed, the erroneous nature of some arguments used in its favour, the lack of comprehension, even on the part of the government, of the full significance of its course, and the multitude of factors connected with its consummation. These have been considered elsewhere and need not be repeated here.¹⁷

The ostensible reasons why these railways were taken over may be given briefly. In the first place, they were in such financial difficulties that they could not surmount them alone and the government was determined to give no more money to private railways. In the second place, if they were allowed to go into insolvency and be operated under a receivership it might be thought injurious to the credit of Canada, since the government had assisted these roads to such a large extent. It was necessary to save the credit of the country. Both these arguments had a substantial basis. In the third place, they were taken over on the assumption that the people wanted government ownership. In reality, this issue had never been put before the people, although there were certain newspapers which were clamouring for it. And, in the fourth place, it was said that the Grand Trunk and Grand Trunk Pacific were essential to round out the government system of railways to that it might be able to compete with the Canadian Pacific Railway; in other words, that the Grand Trunk, which had a good network of lines in all the important centres in the East and which could be a great source of traffic and of strength, was necessary as the eastern connection of a system which otherwise would have insufficient access to the best paying traffic of the country.

On November 4, 1919, the Bill for the acquisition of the Grand Trunk Railway System by the government was passed by the House of Commons and about three days later by the Senate. On March 8, 1920, the agreement between the two parties was signed, providing that the hearings before the board of arbitration should be completed and the findings reported within nine months from the date of their appointment. The board was constituted with Sir Thomas White representing the government, ex-President Taft of the United States representing the Grand Trunk, and Judge Cassells of the Exchequer Court as chairman, and its report was expected by April 9, 1921. The matter dragged on slowly and with much resentment, and the arbitration period had passed without the board being able to complete its work. In order to complete this, a new agreement had to be drawn up between the government and the Grand Trunk, which was ratified by Parliament. Under this, the property passed into the control of the Dominion government, which named five directors to administer it, and the board of arbitration resumed its work.¹⁸

The award of the arbitrators was made public on September 7, 1921, and the majority held that the preference and common stocks had no value. The grounds given for this view may be summarized as follows.¹⁹ First, the manipulation of the company's accounts, which rendered the books unreliable and which was done at the instigation of the chairman of the London directorate in order to pay dividends which were not earned; second, the draining of the company's earnings to pay dividends, rather than using them to provide for maintenance and improvement of the property; third, the admission of the President of the company in 1916 that if left to itself the whole Grand Trunk Railway System would have to go into insolvency if all legal obligations had to be met; fourth, the enormous amount owing to the government by the Grand Trunk on behalf of the Grand Trunk Pacific for funds for construction, for the payment of fixed charges and operating expenses, and for the expenses of receivership; fifth, the value of the stock should be determined on the basis of the net earnings, actual or potential, and since the Grand Trunk System, as a group of inter-related companies, had no net earnings, but rather a deficit, and was not likely to have any surplus for many years, the stock could not have any investment value.

Chief Justice Taft, on the other hand, dissented from the majority view, and stated the value of these stocks to be not less than $48,000,000. He considered that they had a potential value, because there was every reason to expect that with the return of normal conditions the stock would again pay dividends. Moreover, he did not agree with the government witnesses in their enthusiastic condemnation of the physical condition of the railway and its equipment, or with the other arbitrators in refusing to admit any evidence as to the replacement values of the physical assets of the Grand Trunk.

An appeal from this award of the board of arbitration was taken by the Grand Trunk Railway shareholders to the Judicial Committee of the Privy Council in London. The principal question involved in the appeal was as to the correctness of the decision of the majority of the arbitrators in excluding as inadmissible the evidence of the value of the company's physical assets. This was a question of law and their Lordships decided that the arbitrators did not err in the law and, therefore, that the appeal failed and should be dismissed.

It was almost inevitable that the preference and common stockholders, whose securities were deemed to have no value, should be greatly dissatisfied; and in 1923 they made certain serious charges against the Canadian government. Their chief contentions were: First, that their losses, due to the failure of the Grand Trunk, were caused by the Grand Trunk having been compelled to enter into a contract with the government for the construction of the Grand Trunk Pacific and its eastern extension, the National Transcontinental; second,that the Canadian government confiscated the property of the Grand Trunk shareholders; third, that the government refused to allow the railway company to increase its rates to meet the increased cost of operation; fourth, that the arbitration board, which found that the preference and common stocks were without value, was biassed by having a majority of Canadians; and, fifth that the treatment accorded to the Canadian Northern when it was taken over by the government was more favourable than that accorded to the Grand Trunk because the former was a Canadian company.

In answer to these accusations the government issued a reply which dealt very fully with them seratim:²⁰

1. That the Englishman, as a rule, is a "good sport" and that if he bought some shares in a Canadian railway and these depreciated in value he should not expect the Dominion government to make good his losses. Moreover, the contract between the Grand Trunk and the Canadian government for the construction of the Grand Trunk Pacific was entered into voluntarily and deliberately by the two parties and was in no sense forced upon the Grand Trunk.
2. That the Dominion government did not confiscate the Grand Trunk property, as shown by the fact that after the government had given assistance again and again to the company, the latter admitted its inability to carry on and the government took over the property under a contract voluntarily made with the London directors.
3. That railway rates are regulated by the Board of Railway Commissioners, which gave equal treatment to all railways.
4. That the government appointed one member of the board of arbitration and the Grand Trunk another, and these two agreed upon the chairman of the board. No fairer method of choosing the arbitrators could be found. In addition, the board's decision had been upheld by the Judicial Committee of the Privy Council, the highest tribuntal of the Empire.
5. That the payment of $10,000,000 to the Canadian Northern was made upon the recommendation of a properly constituted board of arbitration "and their award must be accepted as the conclusion of three of Canada's ablest men on a matter that admitted of great diversity of opinion."

The position of the preference shareholders, who were more generally small investors and who could ill afford the loss, was somewhat different from that of the common stockholders. they had been receiving their dividends, sometimes in full, sometimes only in part, and even at that only intermittently. The Dominion government in its first offer had made provision for a dividend distribution in perpetuity to the preference shareholders, but that offer had been refused by the Grand Trunk directors. Therefore, the government could not be held responsible for the losses now sustained by these shareholders.

Finally, the shareholders' committee sought, on compassionate grounds, the consideration they had previously declined as a business proposition; but, on account of the heavy burden upon the Canadian taxpayers to make up the deficits of the National Railways, the government could hold out no hope of granting compassionate allowance. This position was reaffirmed by the Prime Minister at the time of the Imperial Conference in London in October, 1923.²¹

Grand Trunk Pacific Debenture Holders' Case.—Another group of London interests, namely, the holders of the Grand Trunk Pacific 4% debenture stock, sent two representatives to Ottawa, in 1923, to present their claims. Their contention was that the 4% "guaranteed" stock of the Grand Trunk which ranked after the 4% Grand Trunk Pacific debenture stock, and which had no guarantee, while the debenture stock had a conditional one, was being paid its interest while the debenture stock was not receiving any return. But under the contract between the Grand Trunk and the Grand Trunk Pacific the "guaranteed" stock of the former was not entitled to any income so long as the interest on the Grand Trunk Pacific debenture stock was in default. Consequently, the government, in making the Grand Trunk "guaranteed" stock a security ranking prior to the Grand Trunk Pacific debenture stock, was acting contrary to the legal obligations and causing injustice to the debenture stockholders.

In reply, the government presented some very pertinent facts showing that its original offer to assume all obligations of both the Grand Trunk and the Grand Trunk Pacific was rejected, and the final arrangement involved only the acquisition of the Grand Trunk capital stock and, in that way, control over the physical property; that at no time before the Grand Trunk Pacific abandoned the road were its earnings enough to pay even operating expenses; and that the Grand Trunk, the only year when it had funds with which to meet this obligation, turned those funds to the payment of dividends to its own stockholders rather than to the payment of interest on the Grand Trunk Pacific debenture stock. It was, doubtless, true that this legal claim was enforceable against the Grand Trunk Pacific and also against the Grand Trunk within the limits of its conditional guarantee; but as the government had no guarantee in the matter it had no obligation for the debenture interest.²² In August, 1924, however, even without any legal obligation, the Dominion government notified the debenture holders' committee in London that for that year it would pay the 4% interest on this debenture stock, the amount of which was $34,879,252 and the interest on which was, therefore, $1,395,170.

Operation of National Railways.—When the Canadian Northern Railway was acquired in 1917 the government continued to operate it under the corporate machinery by which it had been operated previously, but with a reorganized board of directors named by the government. To this system there were added for operating purposes the lines of the Intercolonial, the National Transcontinental, and the Grand Trunk Pacific, the latter of which was in the hands of Minister of Railways as receiver after March 9, 1919.

The operating results of this disorganized aggregation of lines showed that for the years 1919 and 1920 there were deficits in operat­ing expenses and fixed charges amounting to $48,242,536 and almost $70,000,000 respectively. These figures do not take into account interest on the capital of the Intercolonial and National Transcontinental Railways, which has never been charged against their operating revenues.²³ This heavy increase of the deficit constituted a serious situation and the committee appointed by Parliament to investigate the matter found that the chief reasons therefor were: in the first place, high wages, which were due to the application in Canada of the "McAdoo award" and the "Chicago award" in the United States. These enormous increases augmented the pay-roll of the Canadian National Railways by 88% in two years, while the increased rates allowed failed to keep pace with the increased wages. In the second place, the high cost of fuel and other materials was increasing greatly the operating expenses. In the third place, a large amount of deferred maintenance charges was being made up, and these were charged to operating expenses, not to capital. It is clear that the increase of wages alone would account for more than the increase of the deficit.²⁴

Difficulties of the National Railways.—Probably no railway management ever had a more difficult task than that with which the Canadian National Railways were confronted at this time. Consider the circumstances. The Canadian Northern part of the group had been taken over because its revenues were inadequate to pay its operating expenses and its fixed charges. The Grand Trunk Pacific had not earned enough to pay even its operating expenses and both these roads were in vent great need of increased equipment. The National Transcontinental had heavy deficits of operation due to insufficient traffic, and the Intercolonial during its entire history had required all its revenues to meet its operating expenses. These various elements were to be welded together into a "system". They had never been intended to operate except as individual units. All of them, except the Canadian Northern, were badly located in the matter of securing traffic and their operating conditions were difficult. The character of the service was inferior to that of the Canadian Pacific Railway and, naturally, business went to the latter and left the former. The Canadian Pacific had a large volume of business which it could concentrate into heavy trainloads, while the Canadian National Railways had a comparatively small amount of traffic, which could not be concentrated into heavy trainloads. The operating expenses of the National were, therefore, proportionately heavier than those of its competitor. Add to these facts that in the National group of railways there was much duplication of lines with inadequate traffic, that there was very little co-ordination among the staffs of the various divisions, and that there was an entire lack of esprit de corps among the segregated groups of men, and we can see significant barriers to successful operation. As the climax of all these difficulties there was the public indifference towards these National lines, which brought the bitter complaint from both directors and management that "people do not care whether things go well or not".²⁵

Two proposed solutions of the railway difficulty.—It would seem that the year 1921 was about the darkest year in the history of the Canadian National Railways up to that time; and, as nearly always occurs at such a time, some valuable suggestions for improvement came out of this period of stress. The late Lord Shaughnessy, a great railway statesman, brought forward a plan for meeting the financial difficulties of these railways, which, had it been adopted, would have effected vast economies in operating expenses, fixed charges, and public debt, as well as in administration. The essence of his proposal was that the Canadian National Railways—which at that time did not include the Grand Trunk—should be combined with the Canadian Pacific for operating purposes (not ownership) under the Canadian Pacific organization. An entirely different suggestion was developed by Sir Joseph Flavelle, who was at that time chairman of the Committee of Management of the Grand Trunk Railway Company. His plan was not one to secure operating efficiency and prevent waste of capital, as was that of Lord Shaughnessy, but a scheme for the organization of the permanent railway company which was to manage the National lines, so that by a proper financial plan only those expenditures which should be reasonably charged would be charged against the company's earnings and the capital account would be divided into productive and unproductive elements. As neither of these proposals was accepted by the government it is not necessary that we should consider them here in detail.²⁶

Unification of the National Railways.—As noted above, in May, 1921, the last, and in many was the most important unit of the whole group of nationally owned lines, namely, the Grand Trunk Railway, was taken over by the government. At first, this system was operated as a separate organization, apart from the Canadian National Railways. On October 4, 1922, Sir Henry Thornton, who had held important railway executive positions in the United States and England, was appointed president of the Canadian National Railways and chairman of the new board of directors which took office at the same time. The former Committee of Management of the Grand Trunk Railway Company and the members of the old Canadian Northern board of management resigned at that time and the new board of directors assumed control of the combined properties with 22,000 miles of line. By an Order-in-Council passed on January 30, 1932, government authority was given for the amalgamation of the Grand Trunk Railway Company with the existing Canadian National Railways, so as to form one company under the latter name.

The work of creating a unified organization out of such diverse elements—of developing an integrated system from lines which were not constructed to work together—was a task of vast magnitude, the nature of which has been previously shown. After a careful survey of the situation, the president and his board of directors decided that the operating organization could best be met by the creation of three districts, namely, first, the Eastern or Atlantic district, including all the lines in the Maritime Provinces and extending as far west as Rivière du Loup, in Quebec, with divisional headquarters at Moncton, N.B.; second, the Central district extending from Rivière du Loup to Port Arthur, and including all the lines in the United States, with divisional headquarters at Toronto; and, third, the Western district extending from the Head of the Lakes, to the Pacific coast, with divisional headquarters at Winnipeg. The head office of the system is in Montreal and to the officials of each division was entrusted as much authority and responsibility as was consistent with centralized administration.

Finances of the National Railways.—In considering the operating finances of these railways we are met at the outset with the difficulty that comparisons of the earlier years are almost impossible because of the changes which were taking place. From 1917, when the Canadian Northern was taken over, until 1919, there were two groups of these railways, namely, the former Canadian Northern System and the Canadian Government Railways, which included the Intercolonial and the National Transcontinental. In March, 1919, when the Grand Trunk Pacific was placed in the hands of the Minister of Railways and Canals as receiver, it was brought under the same management as the other lines, although the accounts were kept separate. In 1922 the Grand Trunk Railway was joined with the others and as noted above, all were placed under a new administration. The work of reorganization, of appointing new officials in charge of the different branches of the service, of moving men from place to place, of co-ordination of service, and of causing all the divisions to work together involved much adaptation of the human forces to new jobs, which could be accomplished only gradually and with great tact and judgment. Then, too, we must keep in mind that all these roads except the Grand Trunk were unable to show any operating surplus, and under most conditions showed heavy deficits. Although much was said as to the economies which would be possible when these railways were brought together under one management, it was unreasonable to expect that deficit-bearing roads, when combined, would prove to be profit producers. When railways are complementary much may be accomplished by combined operation; but when, as in this case, the roads were competitive and not designed to work together, there were narrow limitations of the economies of combined operation. In this, of course, we must clearly distinguish between economies of combined operation and economies due to increase of traffic. It is of the former that we are speaking here.

Before taking over such widely extended and highly capitalized properties upon which it had very heavy commitments, the government should have exercised reasonable business judgment in making a thorough appraisal of their assets and liabilities as well as of their earning power. No private company would undertake such an amalgamation without a complete knowledge of what was involved in the way of equipment and obligation. but no such course was adopted by the government at this time. Before they were assumed, it would have been judicious had the government made a careful analysis of the condition and value of the roadway, real estate, rolling stock, and other equipment of each of the roads, so as to know to what extent the roads were over-capitalized. For the same purpose, and equally careful investigation should have been made as to the obligations of each railway with the object of knowing exactly the extent of the country's liabilities in connection with them. These facts ought to have been secured and given to the public as a basis for the decision as to whether the roads should be taken over. Moreover, this information would have given a clear indication as to the amounts which would have to be spent in improving the properties so as to bring them up to the proper operating standard. But, instead of that, hundreds of millions of dollars have been voted by Parliament without knowing whether the expenditures were necessary and judicious.

While strong criticism must be made of the government's course in taking possession of these roads without giving the people the right to express their approval or disapproval and without giving reasonable consideration to alternative proposals, the plain fact is that most of these railways were bankrupt and the government, influenced, no doubt, by a clamorous public-ownership sentiment in certain sections and by certain biassed elements of the press, determined to take them over. Previous and subsequent to their acquisition, large cash advances had been made by the government to keep the roads in operation, and these, together with the amounts provided in the way of guarantees and bonded debt showed a very heavy instrument of the people in the National Railways.²⁷ The extent of this commitment is well shown in a statement prepared by the Railway Department of the government and presented in the House of Commons on April 1, 1924, from which we learn that the total interest of the Canadian government in the Canadian National Railways, as of December 31, 1923, amounted to $2,065,872,128.

The increases of the debt of this system in the four years 1921-4 were as follows:

Year		Additions to debt due public		Additions to debt due government (including interest)		Total additions to debt
1921		$10,278,767.98		$122,642,468.83		$132,921,254.81
1922		26,326,305.07	28	85,654,123.70		59,327,818.63
1923		18,595,912.04		97,437,273.96		116,033,186.00
1924		90,814,026.70		28,085,159.35		118,899,186.05
					Total............	$427,181,445.49

This total addition to the debt represents an average increase of almost $107,000,000 per year. From later government figures published, the increase in this railway debt for the six years 1919-24 was given as $674,975,273, or an average increase of over $112,000,000 per year. A committee of the Senate which inquired into the railway situation in the spring of 1925 found that in the six years ending December 31, 1924, the addition to the country's obligations on account of the National Railways was $710,943,247 which was more than the entire capitalization of the Canadian Pacific Railway and its subsidiaries. But is must not be thought that all these additions to the debt represented capital expenditures, for, by the existing system of financing, the government borrowed money to provide not only for new capital requirements but also to pay the principal and the deficit of interest on the railway debt. By this means it was paying interest upon the interest of its borrowings, that is, it was paying compound interest.

The amounts required for interest on the funded debt in the four years 1921-4 were as follows:

Year		Interest due public		Interest due government		Total interest on funded debt
1921		$34,476,014.02		$20,966,781.99		$56,442,796.01
1922		34,652,324.38		24,912,875.88		59,565,200.26
1923		35,041,380.28		30,157,943.67		65,199,323.95
1924		38,361,704.14		31,271,043.00		69,632,747.14
					Total............	$250,840,067.36

It is evident from these figures that the annually increasing amount of interest on the railway debt made the interest burden of 1924 almost 25% greater than that of 1921 and that these interest charges amounted to an average of over $60,000,000 per year. While expenditures were necessary to co-ordinate the system, to rehabilitate properties, and to provide further facilities for increasing the earning power of the system, it was grossly unsound financing for the government to continue piling up debt and increasing the interest obligations thereon by the system of compounding noted above, without any commensurate increase in the operating surplus. So long as this interest spindle went on revolving, with its constant impetus to increase in volume, so long would the outcome be uncertain. In the Annual Report of this railway system for 1923 it was stated that the properties had been brought up to a standard which would make possible the handling of increased traffic in the future with normal expenditures, but the government continued without abatement the increase of the debt. Such a policy could not but make the problem of attaining solvency increasingly difficult for the management.

The results of operation, as shown by official statistics, indicate that the net operating deficit of $11,847,818 in 1921 had been transformed into a net operating surplus of $2,886,711 in 1922, $20,430,649 in 1923, $17,244,251 in 1924, and the figure for 1925 it was stated would approach $32,000,000. Such results, if true, would seem to point to the conclusion that the period of deficits had passed and that under normal conditions increasing surpluses might be anticipated. At the same time, however, many men of good judgment in railways and finance were asking the question whether these were real surpluses or whether they only appeared as such in the accounting. It is well known that there is a fairly large amount of maintenance and operating expenses which can be charged either to capital or to revenue, and by charging them to the former the operating surplus might be correspondingly increased.

The vital railway issues.—From the first, the two great financial problems in connection with this system were, first, to prevent the increase and to begin the reduction of the heavy burden of fixed charges, the extent of which we have noted on a former page, and, second, to prevent the revolving of the interest spindle by reducing the interest due on interest accrued due and unpaid. Taking into account the fixed charges of the system, the total deficits amounted to $72,662,278 in 1921, $58,696,912 in 1922, $51,697,675 in 1923, and $54,860,419 in 1924, and, in then words of a former chairman of the board of directors of this system these deficits are as much a loss as if that amount of money were taken out of the country and dropped into the middle of the ocean.²⁹ In this connection it is appropriate to remember that these amounts of fixed charges were exclusive of interest on the National Transcontinental, Intercolonial, and Prince Edward Island Railways, from the inception of which no interest has been charged on the capital cost.

Closely associated with the financial problems there was the need of additional traffic. There was not enough traffic to enable all the railway lines to pay their way. The Grand Trunk Pacific and the National Transcontinental had not enough to pay even their operating expenses. On account of this lack of traffic the Canadian National Railways had been reaching out to get as large a share as possible of the business which the Canadian Pacific had, and these inroads upon the field of the competitor, while detrimental to the latter, were not always of real advantage to the former in addition to its net revenues.

It is evident, therefore, that while the two companies had been working together to eliminate unnecessary trains, to prevent duplication of service, and to stop wasteful competition, which was derogatory to both of them, there was keen competition between them for the available but inadequate traffic. Any extended invasion of the Canadian Pacific field would tend to undermine the strength of this company, the only financially sound company, without compensating advantages for the Canadian National Railways. These circumstances, together with serious anxiety concerning the financial status of the National System described above, led to the appointment of a committee of the Senate during the session of 1925 to inquire into the entire railway situation, with a view to determining a railway policy which would be for the country's welfare. This committee went into conference with leading men in transportation, industry, and finance, and its deliberations were embodied in a recommendation that the two systems should be merged for administration and operation, under a board of directors representing both companies.³⁰ The report shows some important benefits which might accrue from unification, but for the time being a complete monopoly seemed to be inadvisable. Notwithstanding some competitive wastes it was thought that the best service was not obtained apart from the beneficial effects of competition. In view of its recommendation just mentioned, it is strange that the committee was not willing to see this carried out, but instead, it advocated the opposite course. It said that to group these two properties under even the wisest directorate and the most efficient and loyal management, and to maintain among one hundred to one hundred and fifty thousand men the morale which was necessary for effective service, without the stimulus which arises from competition, would be a task almost impossible of accomplishment. Besides, when political affairs were unsatisfactory, when the country's progress was hampered by many factors domestic and foreign, and when our national perspective was not distinct because of inadequate knowledge of existing and future conditions, it would seem to be ill-advised to apply any direct and possibly radical remedy for our railway difficulties. Better results would probably be secured by indirect means, that is, by increasing the volume of traffic available for the railways, through increased immigration and improvement in agriculture, industry, and trade. the extent of the traffic and the degree of general prosperity would determine the ultimate amount of the National Railway burden.

Sectionalism and politics.—Other things of much importance, as well as the financial and traffic difficulties, intruded themselves upon the management of the National Railways. The president frequently mentioned the necessity of keeping out the baneful influence of sectionalism if successful operation were to be assured. Sometimes political factors made their appearance, notwithstanding the fact the Canadian National Railways is called a private company. The people who own the roads and pay the deficits wanted to have a large amount of control over them, as well as complete information about them. The government, to its credit, persistently refused to give details which would hamper the company's management.

One of the great difficulties of a publicly-owned road is that in most cases the estimates are passed and financial provision is made for only one year at a time. Private companies, on the other hand, have found it necessary to make expenditures year in advance in order to provide for emergencies which are constantly arising. For example, a railway company cannot foresee when there will be an unusual demand for rolling stock and terminal equipment to handle an unexpectedly large grain crop. Its only reasonable course, therefore, is to make provision in advance. The publicly-owned road usually has to be satisfied if it gets its estimates passed for the ensuing year. During our short history of government ownership this is the course which has been pursued in most respects, although there are indications that deviations may be made sometimes from this policy.³¹

Developing additional traffic.—The greatest need of both the railways at that time was a much larger volume of traffic. they could not make bricks without straw. In order to get an increase of traffic there would have to be more productive results in the settlement and colonization of the country. Every means would have to be used to build up this traffic through the development of diversified agriculture and the growth of industries. the right type of settlers should be encouraged to come to the country; they should be shown the best methods of farming and should be instructed in the principles of sound farm financing. The government, which heretofore had been to apathetic and sometimes even hostile to good settlers, seemed now to be establishing an active community of interest with the railways in order to promote colonization. Settlers were to be encouraged to locate near the existing lines of railway, not to go back forty or fifty miles from the railways, in the hope that in a few years branches would be constructed into these remote sections.

But agriculture was not the only thing which ought to be encouraged. The better paying traffic from the railway standpoint consists of manufactured products; and by reason of her rich natural resources, her abundant water power for the production of electrical energy, her inland waterways, and the cheapest railway rates in the world, Canada had unrivalled opportunities for industrial development. Labour and capital would go to those places where the opportunities for securing the good return were the greatest and where there was the lightest burden of taxation. Regarding the latter there is a great challenge for the governments—federal, provincial, and municipal—which have the courage to introduce drastic economies.

Recapitalization of National Railways.—The suggestion was made frequently that because the capitalization of the Canadian National Railways was much too high it should be reduced. Had the component lines been allowed to go through receivership—which is the natural course for companies which cannot pay their way—the capital liabilities would have been cut down to accord with the existing or prospective earning power. Since the government had not allowed this to take place, it was argued that the capitalization should now be reduced to that basis, and that the remainder should be included in the public debt. to experience taxpayer this change would make no difference, but it was advocated in order to put the railway system upon a normal business basis, making its obligations more commensurate with its income-producing power, thus putting into officers and men the morale, hope, and promise of a better day. But there were many things to be considered before this was effected. If the reduction of the company's obligations should furnish the occasion to force the payment of higher wages, or induce the public or a section of the public by political pressure to demand unduly low freight rates—both of which contingencies were likely to become realities—so that the revenues of both railway systems should be unreasonably depleted, the results would probably be disastrous. Moreover, if, as was suggested by the government, the capitalization were written down to accord with the amount of the obligations due to the public, this would be a false basis; for when large amounts of funds provided by the government had been expended in the development of the property, so as to increase its earning power, the railway company could not reasonably have such amounts deleted from its capitalization and be freed from any obligation of paying a return upon such contributions. There was ample reason for a large scaling down of capitalization which represented vast unproductive expenditures, but a reorganization that might to no further than the writing down of capital was likely to prove of little avail.

Canadian National Railways Act.—It is desirable now to consider the nature of the legislation which was passed following the report of the Royal Commission of 1917. On June 6, 1919, assent was given to "An Act to incorporate Canadian National Railway Company and respecting Canadian National Railways".³² The purpose of this Act was to consolidate all the constituent and subsidiary companies comprised in the Canadian Northern System and to provide for the operation of this system with the Canadian Government Railways as a national railway system under the name of the "Canadian National Railway Company". By this legislation, therefore, all the railways which were owned or acquired by the government were consolidated into one operating unit, the purpose being to eliminate the wastes due to competitive operation of the formerly separate properties and to secure real unity under centralized administration.

It was the repeated affirmation of the majority report of the Railway Inquiry Commission of 1917 that, when the government should acquire the Canadian Northern, the Grand Trunk, and the Grand Trunk Pacific Railways, these roads should be managed by a self-perpetuating board of trustees or directors, constituted as a railway company, and absolutely free from any political interference. That report attached "very great importance to this point that the Board of Trustees should be a permanent self-perpetuating body", and the tenure of office of these trustees was recommended to be the same as that of judges of the Supreme Court, with slight exceptions.³³ During the years when these railways were being taken over, the government was proclaiming constantly its adherence to this report in all its actions; but in this legislation, as in many other respects, it was clearly at variance with the report. Let us look at the most important aspects of this statute.

The Governor-in-Council was given authority to appoint not less than five, nor more than fifteen, to be directors of the company, and not stock ownership was to be necessary to qualify as a director. The majority report called for only five trustees. It is possible that the increased number provided for in the Act was intended to make provision that political pressure from any interest might be satisfied by the appointment of a director to represent that interest.

The directors were to hold office from one annual meeting to another or until their successors were appointed, unless removed by the Governor-in-Council for cause; and upon any vacancy occurring the Governor-in-Council might fill the vacancy by appointing a successor. Could any clearer indication be given that politics might in the future be paramount in the appointment of the personnel of the board? On the other hand, the majority report called for a "permanent self-perpetuating" board, and even the original trustees were to be assured of a tenure of office ranging from three to seven years, while all subsequent appointments were to be for a fixed period of seven years.

The organization of the board of directors, according to the Act, was to be similar to that of an ordinary company. The directors were to be paid by the company for their services as directors such sums as the Governor-in-Council might from time to time approve. Directors were not have any personal responsibility to any other persons, nor were they to be subject to any pecuniary penalty for any act done or omitted to be done in the fulfilment of their office. In a private corporation there is no such granting of power without responsibility. Whenever the shareholders' approval or confirmation was necessary, it might be given by the Governor-in-Council.

The Governor-in-Council might entrust to the company the management of any lines of railway, property, works, or rights and privileges over any such properties or works as might be controlled by the people, and upon such terms and subject to such regulations and conditions as the Governor-in-Council might from time to time decide; "such management and operation to continue during the pleasure of the Governor-in-Council and to be subject to termination or variation from time to time in whole or in part you by the Governor-in-Council".³⁴

If any railway company, whose stock or a controlling interest in the stock had been previously, or should be subsequently, acquired by the people, might be conveniently operated by the Canadian National Railway Company, the Governor-in-Council might transfer such stock or any part of it to the company or any nominee of the company to exercise the voting power of the stock, "upon such terms and conditions as the Governor-in-Council may from time to time determine".³⁵ These two sections of the Act are worth more than passing-notice. They were drawn in such a way as to leave an opening for political influence. casual look at the wording would suggest a useful purpose to be served; that is, that when the company was once established and was able obtain the good results which were hoped, the control of any other railways which came into the possession of the people might be transferred to the Canadian National in order to share in the results of this good management. But a deeper view and a more complete knowledge of the conditions suggest other possibilities in which political pressure might be a potent element.

All deficits in the operation of these railways were to be paid out of the Consolidated Revenue Fund of Canada, and in the event of a surplus existing at the close of any fiscal year this surplus was to be paid into the said Fund.

For financing its requirements or the requirements of any of its subsidiaries, the company might make advances to the latter, or might use their securities to pledge under a trust agreement as the basis for the issue of its own securities or those of any of its con­stituent companies. The company has not yet been sufficiently solvent to do its own financing apart from the government. Notwithstanding the statement of the government in 1917 that the companies taken over would do their own financing, and that the government would only be the stockholder but would not finance them, the government still finds it necessary to provide for capital requirements and for the payment of the heavy operating deficits.

With the consent of the Governor-in-Council, the company might acquire, use, and dispose of the shares or other securities of any other company the business of which might be carried on in the interests of the railway company. This would enable the Canadian National Rail­way Company to buy enough securities of an elevator company, an electric power-distributing company, a motor truck company, or any other company whose business might be made tributary to the welfare of the railway company.

Finally, "with the approval of the Governor-in-Council and upon any location sanctioned by the Minister of Railways and Canals, the company may . . . construct and operate railway lines . . . in respect to the construction whereof . . . Parliament may hereafter authorize the necessary expenditure, or the guarantee of an issue of the company's securities".³⁶ Two or three things must be noted in connection with this section: First, the construction of a private railway company's lines or branches had to be approved by the Board of Railway Commissioners before they could be undertaken; but in the case of these publicly-owned lines all that was necessary was to obtain the consent of the Minister of Railways and Canals for the construction of the line and the authorization of Parliament for the necessary expenditure. The Board of Railway Commissioners could exercise no check against the construction of lines designed for purely political purposes; it had nothing to say as to whether the new lines or branches were necessary or not. Upon this basis, lines might be authorized merely to secure political capital or to give compensation for votes. There is no limit to which a party with a large majority in Parliament might not go in using this power to strengthen its position in the country. Second, capital expenditures were in the control of Parliament, although the control of the operating and other revenues was vested in the railway management. Third, this section shows clearly that there was discrim­ination shown against the privately-owned railway system as a result of the passage of this Act; and it would seem as if political expediency might have suggested such discrimination as that which was embodied this legislation.

In view of what we have just indicated as to the contents of this Act, it is apparent that the government, which professed to be follow­ing "line by line" the majority report of the Railway Inquiry Commis­sion, deviated very widely from it in enacting this measure. Section after section of this incorporating statute affirms that the Governor-in-Council was to have direct control over nearly every important phase of the company's business and that the company was really the creature of the government rather than the permanent self-perpetuating body, free from political interference, which was recommended to be established.