The United Province of Canada Was Created in 1841 in order to Rescue Upper Canada from Bankruptcy; the Tight Interface of Government and Business Led Directly to a Total Compromise of the Public Finances

William Hamilton Merritt's scheme for the Welland Canal was initially sold to the government of Upper Canada in 1824 with the assurance that the total cost of the project would not exceed $42,000 and that it would not cost the government a cent! Several million dollars later, in 1840, and with a total public investment of over one million dollars, some major rethinking of the finances of the colony was called for, as bankruptcy appeared imminent.

The Welland Canal episode illustrates many of the critical problems faced by colonial financiers and merchants of the period, and it set a number of important precedents for the future. Its tight interface of government and business was an often-repeated pattern in later years, and led directly to a total compromise of the public finances. The province was bankrupted by the drain on its resources imposed by the canal company. . . .

Despite increasing raids on the provincial treasury, the canal swallowed up capital in ever increasing amounts and other expediencies were tried. An effort to float a big loan with some unspecified "European" banking house foundered after William Lyon Mackenzie, the leader of the Reform party of the province, unveiled a long string of charges of corruption against the company. . . . The Assembly of the sister province, Lower Canada, was also under the control of a Reform movement unsympathetic to the machinations of the governing and mercantile cliques of the colonies: it would invest little to begin with, and nothing further as time went by. . . . increasing demands on the state were made until the outbreak of rebellion in 1837 and 1838 caused a complete collapse of provincial credit in Britain. . . .

The result was the Act of Union of 1841, whereby the two provinces were united in the expectation that spreading the burden of repayment of the bankrupt upper province's debts over the population of the almost debtless lower province would both reassure existing British debenture holders and widen the revenue base for future issues. In conjunction with an imperial guarantee of the interest of a new issue, the credit of the United Province was established in Britain and the path opened for Canadian finance to cultivate an inflow of British portfolio capital in the future.

--R. T. Naylor, The Banks and Finance Capital, vol. 1 of The History of Canadian Business, 1867-1914 (Montreal: McGill-Queen's University Press, 2006), 21-22.