Before Bank of Canada Governor Mark Carney, there was James Coyne.
Beginning in the late 1950s, Mr. Coyne, the former central bank governor who died late Friday at the age of 102, set in motion a chain of events that would eventually allow his successors to comfortably range beyond the confines of interest-rate setting.
Contemporary central bankers such as Mr. Carney and his immediate predecessor, David Dodge, dominate the business pages because they know they can roam beyond monetary policy to influence debate on fiscal policy and corporate strategy without worry of political meddling. The concept of central bank independence has become convention because financial markets function better when investors are assured interest rates and exchange rates will be set by the business cycle, and not the election calendar.
In Canada, the central bank’s arm’s-length relationship with cabinet will be linked forever to Mr. Coyne, who engaged in a public war of wills with the government of John Diefenbaker, culminating in the Bank of Canada governor’s resignation in 1961.
The incident became known as the “Coyne Affair,” a traumatic event that roiled financial markets, embarrassed the government and wounded morale at the Bank of Canada. But in the fallout, Mr. Diefenbaker accepted that the Bank of Canada should have a clear mandate to operate without day-to-day interference from government. “Possibly the greatest thing James Coyne did was to spark the crisis,” said Christopher Ragan, an economics professor at McGill University in Montreal, and a former adviser at the Bank of Canada.
The capsule history of Mr. Coyne’s fight with Mr. Diefenbaker characterizes the incident as a battle between a principled central banker who wanted to guard against inflation, and a prime minister who wanted to stoke a lacklustre economy. However, the struggle was more complex; there were no “white hats and dark hats,” said Bill Robson, president of the C.D. Howe Institute, a think tank based in Toronto.
Mr. Coyne, a Rhodes Scholar with a reputation for brilliance, was unafraid to venture into terrain that had little relation to interest rates. This was uncommon for a central banker, and it irked Mr. Diefenbaker. According to University of Waterloo historian Bruce Muirhead, Mr. Coyne also upset much of Canada’s business and economics establishment, where many viewed the central bank governor’s policy pronouncements as wrong-headed.
“He’s deservedly an iconic figure,” said Mr. Robson, who has written about the Coyne Affair. But, “he went over a line that a lot of us would say a central bank governor should respect.”
Mr. Diefenbaker crossed different lines as he sought to force Mr. Coyne out of his job. In July, 1961, the House of Commons passed a bill declaring the position of Bank of Canada governor vacant, after Mr. Coyne accepted an increased pension that the Diefenbaker government said he should have declined. The Senate blocked the bill after Mr. Coyne defended his position in testimony. Still, Mr. Coyne resigned soon after.
Such an incident is almost unimaginable today. That’s in large part because Mr. Coyne’s replacement, Louis Rasminsky, demanded clear rules before accepting the job. That led to a rewriting of the Bank of Canada Act, establishing that the central bank would be left alone under normal circumstances, and that if the government had a fundamental issue with monetary policy, it would issue a formal directive on what it wanted the central bank to do.
“It was a stroke of genius,” said Prof. Ragan. “The last thing you want is the central bank being pressured to print money going into an election, but you also want it answerable to Parliament.”