On 13 July 1961 James Coyne, Governor of the Bank of Canada, resigned - the final act in a war of words, political intrigue and miscalculation with the federal government that became known as "the Coyne affair".
The Roots of Conflict
The Bank of Canada, the nation's central bank, was established in 1934. Its mandate, prescribed in the Bank of Canada Act, was to perform the following:
- Regulate credit within the country;
- Protect the external value of the national currency;
- Mitigate fluctuations in the level of production, trade, employment and prices as far as possible within the scope of monetary action;
- Provide expert and impartial advice to the government of the day.
Unlike the Bank of England Act on which it was modelled, the Canadian act did not proclaim the ultimate responsibility of the national government in establishing monetary policy. More specifically, under the Bank of England Act, the Chancellor of the Exchequer was empowered to give written instruction to the Bank on any matter which the government believed to be in the public interest. The Bank of Canada Act contained no similar provision, an omission that was virtually guaranteed to create a crisis if ever the views of the government and the Bank on the appropriate direction of monetary policy were sharply opposed.
Governor Coyne
James Elliot Coyne became the second Governor of the Bank of Canada on 1 January 1955. A Rhodes Scholar and former air force pilot, the forty-five year old Coyne had worked at the Bank in various capacities for the previous sixteen years, including Deputy Governor for the last five.
Coyne's central tenet was that monetary policy should focus on growing Canada's money supply at a rate that would keep inflation in check. He was increasingly concerned by the inflationary pressures from excessive levels of domestic demand created by the country's post-World War II economic boom, and by the corresponding reliance on foreign capital to finance that demand.
A Change of Government
In the federal election of 1957, the Progressive Conservative party led by John Diefenbaker ended twenty-two years of Liberal rule in Canada. Diefenbaker formed a minority government and, ten months later, won a majority - the largest one to that point in Canadian history.
The Conservatives took office just as the post-war economic boom was beginning to falter. Unemployment rose, and the economy's rate of growth declined sharply. The Minister of Finance, Donald Fleming, initially held the view that Canada had been living beyond its means, and seemed committed to reducing government expenditures and balancing the budget. However, he backed off when pressured by his caucus colleagues, who wished to continue spending in order to create (or protect) jobs and promote social justice. They received strong support from Keynesian economists at Canadian universities and think-tanks, who viewed the economic downturn as a classic example of the need for expansionary monetary and fiscal policies to combat unemployment.
Coyne believed these proposals to be the bane of sound monetary policy. He attempted to blunt their proponents' thrusts by drawing attention to their inherent dangers in speeches and written commentary. In his annual report for 1959, he took dead aim at the consequences of the government's expansionary measures: mounting trade deficits, additional reliance on foreign borrowing, and increased foreign ownership and control of Canadian industry. He also emphasized the need for Canada to live within its means.
Under Attack
While many economists endorsed the Governor's position, support was far from universal. The Keynesians became implacable foes. In December 1960, more than twenty of them signed a letter to the Finance Minister requesting Coyne's removal. His statements, they claimed, had shaken their collective faith in his competence and in the Bank's ability to address the challenges confronting the economy. However, the letter's sponsors were sharply criticized in the financial press for providing neither sufficient rationale to support Coyne's dismissal nor alternative policy recommendations.
A far greater danger to Coyne was his strained relationship with the government. He and Fleming were at loggerheads, and Diefenbaker was increasingly hostile. The Prime Minister believed that twenty-two uninterrupted years of Liberal rule had thoroughly politicized the federal civil service, to the point where it was largely a nest of fifth-columnists conspiring against his government. Several of the Liberals' most prominent parliamentarians, including party leader Lester Pearson, had come from the civil service, and Diefenbaker openly wondered how many other "Pearsonalities" lurked therein. He viewed Coyne, a Liberal appointee, as a political operative engaged in a partisan campaign. However, Coyne's seven-year term of office did not expire until 31 December 1961 and any attempt to dismiss him before that date risked triggering a crisis of confidence. In the interim, the government and the Governor seemed destined to coexist like two thoroughly miserable spouses unwilling to bear the costs of divorce.
The Gloves Come Off
The simmering conflict burst into public view on 13 June 1961, the second day of a regular two-day meeting of the Bank's Board of Directors in Ottawa, when Coyne issued a statement in the form of a press release.
Coyne's statement alleged that on 30 May, Finance Minister Fleming - acting on behalf of the government - had requested his immediate resignation. The purported reason was a decision taken by the board - in February 1960 - to enhance the Bank's pension plan: the government claimed that by allowing the board to do so, Coyne (who, as Governor, was also the board's chairman) had failed to faithfully discharge the responsibilities of his office. This accusation, Coyne declared, was a slander on his integrity: he could not - and would not - resign quietly and thereby give it credence. Furthermore, for the sake of future governors and in the interests of propriety and decency, he was compelled to bring the entire matter into the open.
Coyne added that Fleming had hinted there was another reason the government wished to be rid of him: the Conservatives were planning to introduce economic programs which they believed he would oppose. The Minister had not elaborated, but Coyne believed he would be betraying his office if he resigned in such circumstances.
Fleming Responds
The government quickly returned fire.
The following day, the Finance Minister addressed the House of Commons. He began by asserting that Coyne's public pronouncements on matters unrelated to central banking and frequent expression of views conflicting with government policy had inappropriately embroiled the Bank in political controversy. He claimed that the government had hoped to avoid a confrontation prior to the expiration of the Governor's term on 31 December, but Coyne's statement the previous day had made that impossible. Fleming then confirmed that he had requested the Governor's resignation on 30 May, and stated the government's belief that Coyne's continuation in office would be detrimental to the implementation of measures aimed at increasing employment and productivity. Finally, the Minister reported that on 13 June, the Bank's board had voted 9-1 in favour of a resolution calling on Coyne to resign. Since the Governor had refused, Fleming announced his intention to bring legislation before Parliament to resolve the impasse.
On 23 June, the Minister introduced a bill in the House declaring the office of Governor of the Bank of Canada vacant as of the date on which the bill became law. It was passed by the Conservative-dominated House without amendment, and was sent to the Senate on 7 July. However, the government would soon discover that, by pursuing a solution via legislation, it had unwittingly set a trap - for itself.
Ambush in the Senate
Over the course of their 1935-57 dynasty, the Liberals had packed the Senate with party faithful: they enjoyed a solid majority in the upper chamber, controlled its various committees, and thus were well-positioned to harass and embarass Diefenbaker's government if an appropriate opportunity presented itself.
Upon reaching the Senate, the bill was referred to the Banking & Commerce Committee for consideration. The committee promptly invited Coyne to give testimony before it. The Governor held court for three days, explaining and defending his position at length before a largely supportive audience. In his closing remarks, Coyne appealed to the committee to recommend rejection of the bill, thereby permitting him to resign with honour - and without delay.
On 13 July, the committee defeated a motion to report the bill without amendment by a vote of 19-7. It then passed, by a vote of 16-6, a motion recommending that the bill not be proceeded with and finding that Coyne had committed no misconduct in office. Later the same day, the Senate voted to accept the committee's report, thereby killing the government's bill. Within an hour of that vote, Coyne resigned.
Aftermath
The Conservatives were rid of Coyne, but it was a pyrrhic victory. The debacle in the Senate inflicted a serious blow to the government's prestige and perceived competence. (According to a poll published on 19 July by the Toronto Daily Star, Canadians supported Coyne by a margin of 6-1.) A subsequent series of missteps compounded its problems and, in the general election of 1962, the Conservatives' historic majority was reduced to a minority government. The following year, a minority Liberal government was elected.
On 24 July 1961 Louis Rasminsky, a deputy governor of the Bank since 1955, succeeded Coyne as Governor. Rasminsky had been quietly approached by Fleming during the crisis, and had agreed to accept on one condition: that the government rectify the shortcoming in the Bank of Canada Act by clearly defining the Bank's powers relating to monetary policy and the government's overall responsibility for economic policy. These changes were formalized in the 1967 amendments to the Act.
Sources
- Bank of Canada. The Bank of Canada: An Illustrated History. Bank of Canada, Ottawa, 2005.
- Bliss, Michael. Right Honourable Men. HarperCollins Publishing Ltd., Toronto, 1994.
- Diefenbaker, John G. One Canada. Macmillan of Canada, Toronto, 1976.
- Jamieson, A. B. Chartered Banking in Canada. The Ryerson Press, Toronto, 1962 (revised edition).
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