Confederation was meant to be not just a political but an economic union. The purpose of this economic union was the creation of an integrated east-west national economy. One hundred and fifty years later this remains an ideal rather than an achievement.
Only recently have the provinces reached an agreement to make the free movement of people, goods and services across provincial and territorial boundaries the norm with a limited number of exceptions. The British Columbia and Quebec governments are currently threatening to use provincial regulatory powers to prevent the construction of inter-provincial energy pipelines across their borders to the east and west coasts.
This resistance to national infrastructure projects and reluctance to promote the free flow of goods and services between the provinces and territories would have shocked and disappointed the Fathers of Confederation, particularly the Minister of Finance for the then Province of Canada, Alexander Tilloch Galt of Sherbrooke. One of the prime factors driving Confederation was the 1865 American abrogation of the Reciprocity Treaty between the United States and the British North American colonies. This treaty had been ratified in 1854 for a ten-year term with either party able to abrogate it with one-year’s notice after that time. Growing protectionist sentiment in the USA and the supply of British-made warships to the Confederacy during the American Civil War were the main reasons for the American decision to abrogate the treaty.
All the British North American colonies had prospered under the treaty and the impending loss of free trade in natural products with the USA turned the minds of the colonists to expanding their trade with each other and with the United Kingdom to offset the loss of free access to American markets. To this economic imperative for a British North American east-west economy was added the threat of military invasion. In the spring of 1866 there were abortive Fenian invasions of New Brunswick and Upper and Lower Canada by American Irish nationalists, attempting to annex those colonies to the USA by force.
One of these Fenian armies crossed the border at St. Alban’s, Vermont near Galt’s constituency in the Eastern Townships. But even before the abrogation of the Reciprocity Agreement took effect and more than a full year before the Fenian invasions, Galt had argued for a strong federal government with “all the large sources of revenue” to provide for the common defence and undertake large public works to bind the original Confederation partners and later British Columbia and the Northwest Territories of the Hudson Bay Company together including a transcontinental railway line completely north of the American border.
The first step in this massive infrastructure program was an Intercolonial Railway from Halifax to Rivière du Loup through the North Shore of New Brunswick. It was not completed until 1876. The Canadian Pacific Railway from southern Ontario to the west coast was begun almost a decade later and was completed only in 1885. Political union could not long have been maintained without a transcontinental east-west transportation system. An economic union and an integrated national economy became possible only once that system was in place.
The mixture of political and economic imperatives motivating Confederation is illustrated by the route of the Intercolonial Railway. Instead of crossing New Brunswick through the populous St. John River valley, it went up the more sparsely populated east coast of that province to make it more difficult for American invaders to sever the rail link between the Maritimes and Quebec. Once completed, in recognition of the non-commercial character of the Intercolonial Railway’s route, the government-owned line adopted a policy of setting freight rates low enough to build traffic and encourage trade between the Maritime Provinces and Quebec and Ontario.
So important did Galt consider a strong federal government with a monopoly on the main sources of revenue for the building up of a transcontinental economic union that he intended that per capita federal grants to the provinces would be their main source of revenue. The one source of revenue he placed in the provinces’ hands, the power of direct taxation (income and sales taxes), was for the purpose of restraining rather than encouraging large expenditures by the provinces. He believed such taxes would be so unpopular that any province levelling them would risk defeat at the polls. In his words, “If the men in power find that they are required, by means of direct taxation, to procure the funds necessary to administer the local affairs…they will pause before they enter on any career of extravagance.”
On the other hand, Galt saw an expansive role for the national government in undertaking the works necessary to build up a national economy. “One of the first acts of the General Government of the United Provinces,” following the construction of the Intercolonial Railway he told the legislature of the Province of Canada in February 1865 , “will be to enter into public obligations for the purpose of opening up and developing [the Northwest] and of making it a source of strength instead of a burden to us and to the Mother Country… The country”, he declared, “desires and cries for “ measures “whereby its internal prosperity, peace and happiness may be developed and maintained.” It was a noble vision calling on the people of the new nation to forswear narrow parochial interests to build a great political and economic union. It still meets with resistance and foot-dragging from those with narrower and less ambitious motives.