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Second majority and Pacific Scandal, 1872–1873

In the run-up to the 1872 election, Macdonald had yet to formulate a railway policy, or to devise the loan guarantees that would be needed to secure the construction. During the previous year, Macdonald had met with potential railway financiers such as Hugh Allan and considerable financial discussion took place. The greatest political problem Macdonald faced was the Washington treaty, which had not yet been debated in Parliament.

In early 1872, Macdonald submitted the treaty for ratification, and it passed the Commons with a majority of 66. The general election was held through late August and early September. Redistribution had given Ontario increased representation in the House; Macdonald spent much time campaigning in the province, for the most part outside Kingston. Widespread bribery of voters took place throughout Canada, a practice especially effective in the era when votes were publicly declared. Macdonald and the Conservatives saw their majority reduced from 35 to 8. The Liberals (as the Grits were coming to be known) did better than the Conservatives in Ontario, forcing the government to rely on the votes of Western and Maritime MPs who did not fully support the party.

Macdonald had hoped to award the charter for the Canadian Pacific Railway in early 1872, but negotiations dragged on between the government and the financiers. Macdonald's government awarded the Allan group the charter in late 1872. In 1873, when Parliament opened, Liberal MP Lucius Seth Huntington charged that government ministers had been bribed with large, undisclosed political contributions to award the charter. Documents soon came to light which substantiated what came to be known as the Pacific Scandal. The Allan-led financiers, who were secretly backed by the United States's Northern Pacific Railway, had donated $179,000 to the Tory election funds, they had received the charter, and Opposition newspapers began to publish telegrams signed by government ministers requesting large sums from the railway interest at the time the charter was under consideration. Macdonald had taken $45,000 in contributions from the railway interest himself. Substantial sums went to Cartier, who waged an expensive fight to try to retain his seat in Montreal East (he was defeated, but was subsequently returned for the Manitoba seat of Provencher). During the campaign Cartier had fallen ill with Bright's disease, which may have been causing his judgment to lapse; he died in May 1873 while seeking treatment in London.

Before Cartier's death, Macdonald attempted to use delay to extricate the government. The Opposition responded by leaking documents to friendly newspapers. On 18 July, three papers published a telegram dated August 1872 from Macdonald requesting another $10,000 and promising "it will be the last time of asking". Macdonald was able to get a prorogation of Parliament in August by appointing a Royal Commission to look into the matter, but when Parliament reconvened in late October, the Liberals, feeling Macdonald could be defeated over the issue, applied immense pressure to wavering members. On 3 November, Macdonald rose in the Commons to defend the government, and according to one of his biographer, P.B. Waite, he gave "the speech of his life, and, in a sense, for his life". He began his speech at 9 p.m., looking frail and ill, an appearance which quickly improved. As he spoke, he consumed numerous glasses of gin and water. He denied that there had been a corrupt bargain, and stated that such contributions were common to both political parties. After five hours, Macdonald concluded,

I leave it with this House with every confidence. I am equal to either fortune. I can see past the decision of this House either for or against me, but whether it be against me or for me, I know, and it is no vain boast to say so, for even my enemies will admit that I am no boaster, that there does not exist in Canada a man who has given more of his time, more of his heart, more of his wealth, or more of his intellect and power, as it may be, for the good of this Dominion of Canada.

Macdonald's speech was seen as a personal triumph, but it did little to salvage the fortunes of his government. With eroding support both in the Commons and among the public, Macdonald went to the Governor General, Lord Dufferin on 5 November, and resigned; Liberal leader Alexander Mackenzie became the second prime minister of Canada. He is not known to have spoken of the events of the Pacific Scandal again.

On 6 November 1873, Macdonald offered his resignation as party leader to his caucus; it was refused. Mackenzie called an election for January 1874; the Conservatives were reduced to 70 seats out of the 206 in the Commons, giving Mackenzie a massive majority. The Conservatives bested the Liberals only in British Columbia; Mackenzie had called the terms by which the province had joined Confederation "impossible". Macdonald was returned in Kingston but was unseated on an election contest when bribery was proven; he won the ensuing by-election by 17 votes. According to Swainson, most observers viewed Macdonald as finished in politics, "a used-up and dishonoured man".