Paul Martin remembers how he came to the view that he couldn’t work with the Bank of Canada governor.
As a rookie finance minister in 1993, he faced a dangerous level of government debt. Hard decisions clearly lay ahead.
The Bank of Canada governor at the time was John Crow, a controversial inflation hawk. In their private meetings, Mr. Crow was a forceful advocate of a two-year-old practice called inflation targeting (a policy, now 20 years old, that must be renewed before January).
Mr. Crow wanted to keep the target inflation at below 2 per cent, meaning a target range of 0.5 per cent to 2.5 per cent. Mr. Martin wanted a target range of 1 per cent to 3 per cent. While the difference appears small, Mr. Martin says his concern was that Mr. Crow wanted to keep moving the target even lower, adding further strain to an economy with deep spending cuts on the horizon.
Within a matter of months, Mr. Crow would no longer be governor and Mr. Martin got his way with a 2 per cent inflation target, which remains in place today.
“Reasonable people can have differences,” Mr. Martin told The Globe and Mail in a recent interview.
When there are differences between the governor of the Bank of Canada and the minister of finance, Canadians rarely find out.
With so much riding on the elusive concept of “confidence” in the economy, much effort goes into showing that the key economic players are on the same page. An example of this is the recent photo op of Prime Minister Stephen Harper chatting economic policy in his office with Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney.
While the bank has independence over how it accomplishes its mandate, every five years the minister of finance can weigh in on that mandate as both must agree on how to jointly renew Canada’s inflation-targeting regime.
As The Globe reported Monday, the 2-per-cent target is likely to be renewed this fall with some new language on “ flexible inflation targeting,” allowing the Bank to take longer than usual to bring inflation back to the 2-per-cent target.
In spite of this rare window to debate the Bank’s role – particularly as the recession has challenged many accepted economic theories – the House of Commons finance committee has no plans to hold hearings on this issue.
In his interview with The Globe, Mr. Martin provided a glimpse into those highly-sensitive closed door discussions between minister and governor.
“I had and have huge respect for John Crow,” Mr. Martin said before explaining their disagreement. “My concern was twofold: One, I did not want to have a dispute with the governor of the Bank of Canada a year into our mandate when we were really beginning to deal with the deficit. It was very important that fiscal policy and monetary policy be able to work in concert. And so it was important to have an understanding between the minister of finance and the governor of the Bank of Canada as to where we were going. ... And I just felt that if there was going to be a difference of opinion, it should happen at the beginning, because I fully had in my mind the ’95 budget, which was the one that dealt with the deficit.”
Mr. Crow could not be reached for an interview, but he offered his own account of the disagreement in his 2002 autobiography, Making Money. He said it played out over three meetings and that the government’s rationale was never clearly stated.
“It was not explained to me, though I suspected from the questions asked around the issue that it had something to do with financing the budget deficit,” he wrote. “Furthermore, in the same way as I considered the [inflation target]modification unacceptable, the government evidently saw it as one that was so important that it absolutely had to get it, even though any change that generated uncertainty had the potential for significant costs in terms of increased charges, given the very large size of the national debt.”