Debt & The Death of Democracy

For those not familiar with the International Monetary Fund(IMF), it is an international organization designed to help nations that are struggling under massive debt.

Though it is often looked down upon for the policies and demands it places on nations utilizing its services, the IMF is more than simply a debt relief agency. It is a guardian of democracy.

The IMF was conceived and created as a direct result of the sort of situation that developed in the early decades of the 20th century right here in Newfoundland and Labrador. The events that helped form the IMF speaks to the realities of our past and the province's current situation.

The following are excerpts from a “Gobalist” article available at:

http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=3088

THE IMF

What has been missing from contemporary debates about the IMF’s role is any memory of what the world was like before the Washington-based institution’s creation.

The most extraordinary debt restructuring of the pre-1945 era did not occur in Latin America. It was in a dominion of the British Empire, the country of Newfoundland.

During the early 1930s, Newfoundland experienced a form of political punishment and national humiliation for its debt problems which has never been surpassed by any other country with financial problems.

The British established settlements to exploit Newfoundland’s fishing resources after John Cabot explored it 1497. Newfoundland then became Britain’s oldest colony.

The King authorized the governor to establish the island’s first parliament in 1832.
That made it the second-oldest parliament (after Westminster) in the Empire.

In the late 19th century, Newfoundland was sovereign enough to negotiate trade agreements with the United States — and enjoyed all the other traditional trappings of sovereignty. However, the Newfoundland government went on a slippery path when it chose to borrow heavily.

First, it did so to finance military expenditures during the First World War, then to finance the construction of a railway — and to cover operating deficits throughout the 1920’s. By 1933, there was a public debt of over $100 million — and Newfoundland’s national income was just $30 million.

The Great Depression put Newfoundland over the edge.

The Newfoundland government turned to the British government for help. London obliged — by appointing a royal commission to investigate the country’s economic situation. The commission produced a report which condemned Newfoundland’s fiscal policies in the 1920s for creating an unsustainable debt burden.

Critics of the IMF, take note: The commission’s proposed solution to the crisis has no parallels in any other sovereign debt restructuring. The royal commission proposed that Newfoundland should give up both independence and democratic self-government.

The British government would establish a special six-man commission and royal governor to head the country.

The commission would not be responsible to the people of Newfoundland but to London — and the British House of Commons.

The notion that a self-governing community of 280,000 English-speaking people should give up both democracy and independence in order to avoid debt default was unprecedented.

The commission could not fundamentally transform the country’s economic situation.

The way out was offered by Newfoundland’s neighbor, Canada. The Canadians offered to take on 90% of the island’s debt if it joined the Confederation. On April 1, 1949, Newfoundland became a province of Canada.

Curiously, Newfoundland’s Parliament never ratified the confederation treaty. The treaty itself was an act of Britain and Canada, not Newfoundland. But that was because the British — who were essentially Newfoundland’s creditors — wanted it that way. Even if Newfoundland’s own representatives did not.

If the IMF had existed in 1933, it would have granted emergency debt relief to Newfoundland. The country would have never given up democracy or independence. Indeed, democracy is now a pre-condition for IMF aid.

But as no institution such as the IMF existed in 1933, Newfoundland was compelled to choose between democracy and default.

The story of Newfoundland during the 1930s continues to be a unique tale of how the British Empire coped with a debt crisis in a small country.

It is also a reminder of why in the aftermath of World War II the nations of the world created the International Monetary Fund. They did not want nations to ever again confront a choice between debt and democracy.

It is a legacy worth pondering as we contemplate the future…