2. Business Cycles and Risk

The fate of the various Royal Mail Line proprietors was intimately linked to the succession of business cycles which dominated the mid-nineteenth century Canadian economy. Their freight business was directly tied to these cycles. Indirectly so was the vital passenger trade. The uneasy commercial classes, to whom the vessels catered in periods of economic growth, tended to reduce the extent of their travels while steering their affairs in troubled times. With the exception of the famine migration of 1847, immigrants through the end of the 1850s pursued a similar course.(3) Consequently, the passenger steamboat's receipts grew and declined along with the business cycle.

Unfortunately the credit system was not as closely attuned to the needs of the steamboat entrepreneur. The major financial instruments were designed for an export-based economy with a turnover of capital every two to four years.(1) The terms of mortgages and accommodation notes all reflected this cycle. By contrast, the capital of a steamboat, if annual rents are to be taken as a guide, was not expected to be renewed for a period of from eight to ten years.(2) Typically these vessels would be run in the passenger trade for about seven or eight years before the balance of their value would be realized by selling them as freight boats. Through the regular renewal of notes and mortgages the banks did allow for some adjustment within the system. Unfortunately proprietors relying on this accommodation remained vulnerable to the bankers' necessity to reduce their obligations during periods of stress.

This danger served to reinforce the wisdom of a conservative investment plan. Survival was best assured through a strategy of slow growth--financing new acquisitions out of previous earnings. Expansion financed by the banks was always exposed to the risk of the banks calling in their loans or refusing to renew them. Even if the sympathy of the bank was secured by personal contacts with the board of directors, rapid expansion stretched resources thinly. Any reversal--the emergence of a new competitor with some strategic advantage, the unexpected loss of an underinsured boat, the poor health of a major backer, a sudden downturn in the business cycle--could precipitate failure despite that advantageous relationship with the bank. Thus, slow growth and a minimum of indebtedness remained the preferred long-run strategy as long as the proprietorship of one or more vessels lay in the hands of one or two men with unlimited liability.

To view Bethune's chequered career as "a significant example of the reckless promotion characteristic of both water and rail transportation" in this period is both to exaggerate his aggressiveness and to suggest that most of the other steamboat proprietors pursed a similar strategy. In fact, Bethune's operations were exceptional in only two respects: his attempt to purchase every vessel he operated and his rapid expansion on a weak financial foundation. Moreover, several of his moves were tactically sound, especially his decision to build four vessels in the early 1840s and purchase the Niagara. It was not until the recession of 1843-44 put his operations on the ropes that Bethune's investment decisions became almost irrational, especially his foredoomed attempt to buy out all competition. During the unfortunate career of D. Bethune & Co. he brought the firm into the Relative security of the cartel arrangements. This action is far more representative of the characteristics of the steamboat trade than his subsequent personal cupidity in embezzling its funds.

If there is a significant example which characterized the response of the passenger steamboat trade to the harsh realities of the business cycle and competition it was the cartel agreement of 1850. Like the line operations before it and the Canadian Inland Steam Navigation Company after, it symbolized the effort, not necessarily to eliminate, but to control and channel competition. From year to year there proved ample opportunity for change and expansion but ultimately the objective of the principal members of the group was stability of the sort which produces the greatest profits and the least risk. Behind these agreements were to be found every major and minor interest in the mail lines before 1861, including some whose greater fear may have been exclusion.

Where the cartel agreements were eventually a victim of the downward turn of the business cycle, the Canadian Inland Steam Navigation Company was better adapted to both long term survival and expansion. The stock it sold in 1868 to finance the purchase of six vessels brought the necessary capital to the firm without the commitment of a loan or bond to the repayment of the principal. If the money had been borrowed the firm would have been committed to paying a fixed interest rate. By selling stock it needed only to pay dividends when and to the extent justified by earnings. In a situation where an individual proprietor might have been forced into bankruptcy the joint stock corporation could still survive by not paying those dividends. It was this capability, coupled with the advantage to the investor of limited liability that enabled the joint stock company to evade the fate of most of the preceding proprietors and begin a cycle of expansion, takeover and merger.

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Chapter 5 appeared in FreshWater.