Canada Cement Affair Prompts Legislative Reform

Date October, 1909

The formation of the Canada Cement Company began the first great Canadian merger wave and precipitated a financial and political scandal that reached its peak during the 1911 election.

Locale Canada

Key Figures

• William Maxwell Aitken (1879-1964), president of the Royal Securities Corporation
• Sir Sandford Fleming (1827-1915), director of the Canadian Pacific Railway and president of the Western Canada Cement and Coal Company
• Sir Edward Seaborne Clouston (1849-1912), general manager and vice president of the Bank of Montreal
• Sir Wilfrid Laurier (1841-1919), prime minister of Canada, 1896-1911
• William Lyon Mackenzie King (1874-1950), labor minister of Canada, 1909-1911
• Robert Laird Borden (1854-1937), prime minister of Canada, 1911-1920

Summary of Event

Consolidated in October, 1909, the CanadaCement Company was formed through one of the first of about forty major industrial mergers that swept Canadian business during a four-year period. The company’s size and the alleged monopoly power it created made the merger the most publicized of the era. Canada Cement’s promoter, William Maxwell Aitken (later Lord Beaverbrook), would be lionized in the establishment press as a financial wizard and pilloried in the populist press as a maker of trusts. Sentiment against Canada Cement and other mergers ran so high that Prime Minister Sir Wilfrid Laurier’s government was pressured into passing an antitrust law targeting mergers. When the general public became aware of a business dispute between Aitken and Sir Sandford Fleming, a prominent and respected member of Canadian society, their struggle became part of the intense political campaign then being waged over a prospective free trade agreement between Canada and the United States.

As in the case of Great Britain’s Associated Portland Cement Manufacturers merger in 1900, the origins of Canada Cement lay in the technological revolution sweeping the portland cement industry at the end of the nineteenth century. Large rotary kilns fired by pulverized coal produced better and cheaper cement (and thus better and cheaper concrete), which was rapidly becoming the building material of choice throughout the advanced industrial world. This technological change, coupled with the unparalleled economic growth that Canada experienced during the first decade of the twentieth century, resulted in the establishment of dozens of new portland cement plants throughout the country to supply the booming construction industry.

This new mass-production technology, however, created a glut of cement during the industrial downturn that followed the financial panic of 1907. Operations that were just coming onstream in 1908 were hardest hit. One of these companies, the Western Canada Cement and Coal Company, with its plant at Exshaw, Alberta, found that the only way to prevent bankruptcy was to dilute its debt in a merger with a number of other, more solvent, cement companies. After consulting with Sir Edward Seaborne Clouston, the general manager and vice president of the Bank of Montreal, Canada’s largest and most powerful financial institution, Western Canada Cement’s board members called on Aitken, then a young Montreal investment banker, to lead the merger syndicate. Clouston, whose own bank was owed hundreds of thousands of dollars by Western Canada Cement, believed that Aitken was the man to execute the merger properly and thereby protect the Bank of Montreal’s interest. He thought so highly of Aitken that he had been a regular member of Aitken’s underwriting syndicates and had become a shareholder in Aitken’s investment bank, the Royal Securities Corporation.

Aitken started work on the merger negotiations in April, 1909, and by the summer he had convinced the owners of every modern plant in the country, as well as some older but larger cement producers, to join his consolidation. He hoped that the resulting company would be able to eliminate overproduction and prevent the price of cement from falling any further. Although the chief shareholders of the companies joining the merger were enthusiastic supporters of Aitken’s strategy, some were forced to accept less than they thought their companies were worth. Aitken was particularly hard on Fleming, the president of two companies entering the merger, who not only had to accept less for his International Portland Cement Company shares but also had to reduce the debt load carried by his Western Canada Cement Company before it would be allowed to join the merger. This reorganization proved difficult, and by the time of Aitken’s deadline of February, 1910, Western Canada Cement found that the majority of its bondholders in Great Britain were unwilling to reduce the value of their securities. At this point, Fleming began to pressure Canada Cement into accepting his plant on easier terms.

As honorary president and one of the original incorporators of the newly merged company, Fleming should have been in a strong position to extract some concession from Canada Cement, but Aitken, working behind the scenes with other Canada Cement directors and his own lawyers, argued against this course of action. Facing an unexpected wall of opposition, Fleming tried to pressure his fellow directors into settling with Western Canada Cement by alleging that Canada Cement had overissued $12 million worth of securities to Aitken as remuneration for his promoting services. Fleming threatened to go public with his allegations.

In an effort to prevent the damage that such bad publicity would inflict on Canada Cement, the company’s board gave Fleming more time to reorganize Western Canada Cement’s debts and agreed to order an investigation into Aitken’s promotion of the company, allowing Fleming’s lawyer to act as one of the two investigators. Their report, submitted in July, 1910, revealed that Canada Cement had not been “robbed” by Aitken, as Fleming had alleged.

Fleming did not accept the report, however, nor did he attempt to write down Western Canada Cement’s debt in order to meet his new deadline. Instead, he presented a proposal to Western Canada Cement’s English bondholders to allow him to reorganize the company and run it as a rival to the new merger. Meanwhile, Aitken, who had just moved to London, met directly with the bondholders and convinced them that they would be better off selling their interest in Fleming’s company at a discount to Canada Cement. The sale took place in January, 1911, forcing the liquidation of Western Canada Cement and its transfer to Canada Cement for the bargain price of less than $1.5 million.

Fleming vowed revenge, as the sale had left him out in the cold. He distributed a circular criticizing the actions of both Aitken and Canada Cement and publicly resigned from his position as honorary president of the company. He then petitioned the prime minister of Canada, demanding a government inquiry into the affair. Prime Minister Laurier met with Fleming but stalled on ordering an inquiry because of the presence of influential members of his own party on the Canada Cement board.

The Bank of Montreal had also lost money on the Western Canada Cement sale. Determined to recoup at least a portion of the bank’s debt, Clouston sued Fleming and members of Fleming’s family on the basis of personal guarantees they had given the bank for loans to Western Canada Cement. Clouston’s position in the lawsuit was complicated, however, by his involvement as an underwriter and part owner of the investment bank promoting Canada Cement as well as by his role in bringing two other Bank of Montreal officers into the promotional syndicate. If this conflict of interest were revealed, the Bank of Montreal’s reputation as a pillar of financial respectability would be destroyed in a scandal sure to rock the normally sedate and conservative business establishment.

Significance

Fleming’s allegations set off a storm of popular protest against mergers and monopolies in general and against Canada Cement and Aitken in particular. Populists and other opponents of big business and finance came out in favor of Laurier’s proposed reciprocal free trade agreement between the United States and Canada. They had pressured his Liberal government into acting against trusts the previous year, when Laurier had called on his labor minister, William Lyon Mackenzie King, to design a piece of legislation that could be used against mergers. King’s response was the Combines Investigation Act, a complex antitrust law that used publicity as its main sanction against monopoly behavior. King’s legislation did not satisfy the populists who wanted to see Canada Cement prosecuted in the same way that the U.S. government had prosecuted the Standard Oil trust.

In the summer of 1910, Laurier visited western Canada, where he was met by a wave of populist and antimonopoly sentiment. King’s antitrust legislation had not satisfied Laurier’s western constituents. Because the populists viewed tariffs as the chief cause of trusts, Laurier began secret negotiations with the United States to lower some of the Canadian tariffs preventing American exports to Canada. Ironically, at the same time, farm activists organized a protest in which hundreds of their representatives traveled east by train and then swarmed into the House of Commons in what they would call the “Siege of Ottawa.” For one day, Laurier was forced to listen to petition after petition about the evils of the “eastern trusts.” He did not reveal that the tariff negotiations were going better than expected.

To his surprise, Laurier found the United States eager to negotiate a comprehensive free trade agreement with Canada. To protect Canadian manufacturers and his political support in central Canada, however, Laurier restricted the agreement predominantly to natural goods. When this proposal, known as the reciprocity agreement, was presented in Parliament in January, 1911, Laurier thought he had a perfect deal. The removal of dozens of tariffs would dampen the antimonopoly sentiment of the western populists, while the exemption of manufactured goods would satisfy the manufacturers of central and eastern Canada.

Laurier soon found, however, that most Canadian businesspeople opposed the proposed trade deal. The Canadian Manufacturers Association in particular feared that an agreement on natural goods would eventually lead to a steady northward stream of manufactured goods as a result of a comprehensive free trade agreement between the two countries. These sentiments were heartily supported by Conservative Party leader Robert Laird Borden, who led a crusade against the reciprocity agreement, and by Aitken, who had opposed the dismantling of the Canadian tariff since 1909 by publishing antireciprocity and anti-American propaganda in his weekly magazine, Canadian Century. Aitken threatened to enter the political fray by becoming one of Borden’s chief election managers, much to Laurier’s chagrin.

In December, 1910, Aitken had been elected a Unionist (pro-imperialist) member of Great Britain’s Parliament, but he continued to keep in touch with Borden. In April, 1911, Borden wrote to Aitken to tell him that an election on reciprocity was imminent and that he expected Aitken to return to Canada and help him defeat Laurier by organizing the Conservative campaign in Nova Scotia and New Brunswick.

To prevent Aitken from returning, Laurier gave the impression that he might order the public inquiry into Canada Cement that Fleming demanded. Aitken himself wanted to explain his side of the story in public to defend his own reputation, but many of his business associates, some closely connected to Clouston and the Bank of Montreal, urged him not to do so. They reached a compromise in which Aitken would remain in Great Britain on the condition that Laurier would agree to prevent a government inquiry into the Canada Cement affair. Aitken’s associates urged him to accept the deal, arguing that the press campaign being waged against him would last only a few days and never do permanent harm to his reputation. Aitken reluctantly agreed, mainly to protect Clouston, to whom he felt great loyalty for past support.

As a consequence, the nature of Canadian finance capitalism in general and Aitken’s activities in particular were never subjected to government investigation. Nevertheless, newspaper coverage of the affair permanently scarred Aitken’s reputation. Aitken would never be able to dispel the prevalent image of himself as a crook, despite the fact that he had not taken even one-fifth of what Fleming alleged as his profit for promoting Canada Cement. Clouston, along with the two Bank of Montreal officers involved in the Canada Cement promotion, resigned and devoted more of his time and energy to his investments in the Royal Securities Corporation. Clouston died of a heart attack in the offices of the Royal Securities Corporation the following year while talking to Arthur Doble, his old executive secretary at the bank and now general manager of Royal Securities in Canada.

Despite Laurier’s best efforts, he lost the election of September, 1911, to the Conservative Party under Borden. As a result of reciprocity’s defeat, free trade between Canada and the United States remained a political impossibility until 1988. During the interwar years, the polarization and western alienation evident during the merger wave of 1909-1913 resulted in new forces of opposition to the “eastern” monopolies and financiers. These forces included western political parties, such as the Progressive Party, the Cooperative CommonwealthFederation, and the Social Credit Party, that would challenge the hegemony of the established parties. Throughout it all, the Canada Cement affair remained the central focus of popular criticism against the Canadian business and financial establishment.

Bibliography

Bliss, Michael. Northern Enterprise: Five Centuries of Canadian Business. Toronto: McClelland & Stewart, 1987. Survey of the history of Canadian enterprise puts the first Canadian merger movement into historical perspective and briefly addresses the role of Aitken and the Royal Securities Corporation.

Chisholm, Anne, and Michael Davie. Beaverbrook: A Life. London: Hutchinson, 1992. One of the most objective and well-written biographies of Aitken available. Provides a brief summary of his Canadian financial career and includes an appendix on the Canada Cement affair.

Creighton, Donald Grant. Dominion of the North: A History of Canada. Rev. ed. Toronto: Macmillan of Canada, 1972. Focuses on significant events in Canadian history. Provides useful context and background for an understanding of the Canada Cement affair.

Lamoreaux, Naomi R. The Great Merger Movement in American Business, 1895-1904. New York: Cambridge University Press, 1985. Provides a good explanation of how capital-intensive production processes and rapid growth around the end of the nineteenth century resulted in overproduction and declining prices, helping to create a merger wave. Focuses on the United States, but the principles discussed are applicable to the Canadian case.

McMenemy, John. The Language of Canadian Politics: A Guide to Important Terms and Concepts. 3d ed. Waterloo, Ont.: Wilfrid Laurier University Press, 2001. Collection of more than five hundred brief essays on a wide range of topics related to the Canadian system of government, Canadian political history, Canadian laws and legal history, and more.

Naylor, R. T. The History of Canadian Business, 1867-1914. 1975. Reprint. Montreal: Black Rose Books, 1997. Presents a largely negative view of Aitken, Canada Cement, and the impact of the merger movement on Canadian business and society.