When the Great Depression struck in 1929, Newfoundland was independent and democratic - indeed, like Canada, a dominion in its own right. Four years later, it was a subjugated colony of the British Empire. In This Time Is Different: Eight Centuries of Financial Folly, an especially perceptive work, Harvard University's Kenneth Rogoff and University of Maryland's Carmen Reinhart cite Newfoundland's spectacular decline and fall as a cautionary tale laden with sombre lessons for a global economy that persists in going deeper into debt.

For a dominion of only 280,000 people, Newfoundland had accumulated an extravagant debt in the Roaring Twenties, profligately spending its way to prosperity. By 1929, it owed $85-million, most of it to a syndicate of foreign (Canadian) banks. By 1932, it owed $100-million. Its budget deficit, at $3.5-million, surpassed 10 per cent of its GDP - in relative terms, more than twice Canada's deficit now. Finally, solely to keep Newfoundland's financial crisis from spreading to its own banks, and probably bringing them down, the Canadian government assumed Newfoundland's debt charges.

In the three years between 1929 and 1932, Newfoundland's export earnings fell to $20-million from $40-million, its fishery earnings to $6-million from $16-million. By 1932, one-quarter of Newfoundland's people were on the dole (which provided a meagre 6 cents per person per day, plus small amounts of tea, flour, pork and molasses). Malnutrition was widespread. Violence erupted in the cities.

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In St. John's (population 39,000), the hapless prime minister, Richard Squires, narrowly escaped physical injury or death at the hands of rioters. Sensibly, he resigned. In the national balloting that followed, a merchant named Frederick Alderice was elected on a promise to suspend the constitution and govern the island by means of a non-elected "commission."

In 1933, Newfoundland rescinded its self-government, essentially surrendering itself to Britain, which, given the island's wretched state, wanted nothing to do with it. Britain did establish a royal commission to assess the country's descent into debt. Headed by a Scottish lord, this commission determined that Newfoundland had lacked sufficient frugality for years - an obvious finding, perhaps, though honest - and more profound than first appears. It implicitly endorsed the principle of frugality in good times as well as bad.

In the 12 years between 1920 and 1932, the royal commission noted, Newfoundland posted not a single budget surplus - notwithstanding its booming economy. "These years were characterized by an outflow of public funds on a scale as ruinous as it was unprecedented," the commission said. "Fostered by a continuous stream of willing lenders, a new era of easy money was believed to have arrived. The resources of the Exchequer were believed to be limitless. [Newfoundland's]public debt, accumulated over a century, more than doubled."

With the onset of the Great Depression, the royal commission said, "the country sank in its own waste and extravagance." Looking across the country in 1933, it found "a disillusioned and bewildered people, deprived in many parts of the country of all hope of earning a livelihood and haunted by the grim spectre of pauperism and starvation."

Chicago economist and financial author David Hale, who has written extensively about the demise of Newfoundland's independence, offers a distinctive historical take on it. "Newfoundland's political history of the 1930s is now considered a minor chapter in the history of Canada," he says. "There is practically no awareness of the extraordinary events which occurred there.

"The British government and the parliament of a self-governing dominion agreed that democracy should be subordinate to debt. The oldest parliament in the British Empire, after Westminster, was abolished and a form of dictatorship was imposed on 280,000 English-speaking people who had known 78 years of direct democracy. During the 1930s, Newfoundland experienced a form of political punishment and national humiliation for its debt problems which has never been surpassed by any other country."

In earlier times, Britain had invaded Turkey to collect on its loans (in 1876) and had occupied Egypt for the same reason (in 1882). But it didn't dismember those states. The United States invaded Venezuela (in 1895) as a bill collector. As professors Rogoff and Reinhart document, the contemporary alternative - sending in the IMF - doesn't work all that well, either. Countries now routinely default on their debts with impunity and at twice the frequency of the old days.

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Newfoundland finally joined Canada, more or less voluntarily, in 1949. It took Newfoundlanders two elections to decide to do so - and the matter wasn't on the ballot until Britain, using its anachronistic constitutional authority over a miscreant colony, arbitrarily put it there. In exchange for a 10th province, Canada agreed to assume 90 per cent of Newfoundland's debt. But then, Newfoundland's political economy isn't really the stuff of legend. It's more the stuff of parable.

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