With such a strong majority government , the Alberta Liberals faced little opposition as it passed bills in the temporary Legislature at McKay Avenue School . Its first responsibilities were to establish the institutions of government found in other provinces. It set up a new public education and provincial judicial system and a civil service to run these and other government departments. It approved spending on new construction projects, including public buildings and roads. It also resolved to keep Edmonton Alberta's capital and to pursue the development of a provincial university in Strathcona.
While optimism prevailed throughout the new province, in 1907, the Alberta government faced a new challenge. A series of labour strikes and a severely cold winter created shortages of coal and drove up fuel prices. The Alberta Liberals intervened with the federal government to bring an end to the strikes. It also introduced recommendations and legislation that would improve the distribution of coal but did little to improve miners' working conditions.
From the beginning Rutherford's Liberals were committed to a policy of fiscal responsibility. However, the government saw the need to expand telephone and railway lines to remote areas where these services were not yet profitable. In 1908, it decided to buy the Bell Telephone Company's Alberta lines and establish Alberta Government Telephones. It built new telephone trunk lines throughout the province at considerable expense. It also chartered new railways, subsidizing their construction and guaranteeing interest on loans to the rail companies.
One of these railways, the Alberta and Great Waterways Railway, cost the province a great deal of money and the Liberal government much support. The government chartered the Alberta Great Waterways Company in 1909 to link Edmonton with the rich oil sands
surrounding Fort McMurray. It subsidized its construction at $20 000 per mile and offered bonds to private investors in the company at five percent interest. These terms were more favourable than those extended to other railway builders at the time. Partly as a result, speculators were able to make money by trading the bonds on the London Stock Exchange for ten percent more to other investors. The Waterways Company, however, ran into difficulties when it proved less than capable of building the railway to acceptable standards. Many local newspapers revealed what happened as a scandal.
While a Royal Commission cleared Rutherford and others of any wrongdoing, his government had clearly been taken advantage of. Rutherford felt compelled to resign over the Waterways scandal, though he continued to sit in the Legislature as a backbencher. Many cabinet ministers were also replaced when the Legislature reconvened in November 1910.
The new Liberal government under Arthur Sifton reversed its policy on railways, ensuring that further railway development would not proceed at the public's expense. However, Sifton first had to deal with the money his government had invested in the defunct Waterways Railway. The government was still responsible for paying part of the interest on the bonds it had guaranteed. His Disallowance Petition forcing banks to return the $7 400 000 the government had invested was overturned. The Liberal government, divided over whether to build the railway itself, could not resolve the matter.
The Waterways scandal threatened to defeat the Liberals. At the same time, many members were opposed to the Liberal government's stance on natural resources . They argued with the Conservatives for provincial control of Alberta's lands, minerals and forests. However, its members were eventually able to set aside their differences and defeat the Conservatives in the 1913 election.
With the Conservatives defeated and advocating similar policies, the Liberals faced little opposition inside the Legislature. Instead, grassroots organizations springing up throughout the province began to exert pressure on the Liberals. Groups advocating moral reform and temperance were especially strong in Alberta. Farmers who sided with their views and demanded stronger political representation also formed local associations in the province. The Liberal government eventually gave in to many of the farmers' demands, in part by establishing agricultural schools and a
cooperative wheat pool. It also enacted Direct Legislation, allowing electors to initiate bills by petition . This last act compelled the government to hold a referendum on prohibition in 1915. The all-male electorate voted sixty-one percent in favour of the motion, and on July 1, 1916, prohibition became law.