PUBLIC DEBT AND DEBT MANAGEMENT
ACCORDING TO J.M. KEYNES, the "permanent relations between debtors and creditors . . . form the ultimate foundation of capitalism." 1 Exploring the central factors that influence the prices for government bonds and deviations from this relatively stable set of "permanent relations between debtors and creditors" makes these "permanent relations" more intelligible.
To understand the nature of debt management, its legal aspects must be understood. Debts are legal obligations between a debtor and a creditor. Debts imply that a trust has been bestowed by the creditor upon the debtor, that is, the borrower will repay interest and principal in a timely fashion. Viewed in these terms, debts of the state are conceptually no different from debts of an ordinary individual. Nevertheless financial arrangements between the Dominion government as borrower and public creditors, such as banks and insurers, are more complicated due to the government power to legislate, to tax, to create legal tender, regulate banking and to expropriate property. Still, a creditor holds a promise to repay and by threatening to withhold further loans, that may influence the actions of debtors. Heavy indebtedness, the enforcement of security arrangements, and the withholding of new credit may all give creditors the opportunity to exert influence on the policies of the Dominion government.
Canada's early economic development and its evolution from a colony to an independent Dominion depended on the provision of loans by London. Indeed, Canada's greatest economic historian, Harold Innis regarded Confederation as a "credit instrument." 2 The British North America Act, 1867, devoted considerable attention to the disposition of public debts of the former colonies. 3 Tom Naylor in his colourful history of Canadian business claimed that the only thing that the Canadian colonies had in common were their debts to the Baring Brothers. 4
United Kingdom investors and institutions loaned heavily to colonial and provincial administrations and to the Dominion government and private