Conservative leadership candidate Pierre Poilievre has vowed that, if he becomes prime minister, he will fire Bank of Canada Governor Tiff Macklem, whom he blames for inflation. For his own sake, Mr. Poilievre should reconsider.
The last time a prime minister tried to fire the central bank’s governor, it ruined him.
In 1960, Canada’s economy fell into recession. Donald Fleming, Prime Minister John Diefenbaker’s finance minister, chose to fight the downturn through deficit-financed stimulus, which just about every finance official, economist and banker agreed was the right approach.
But that policy conflicted with the priorities of James Coyne, the Bank of Canada’s rather prickly governor, who believed inflation was the more serious threat. He decided to fight it by raising interest rates.
Twenty-nine academic economists wrote a letter to Mr. Fleming urging that Mr. Coyne be fired. “Surely we are justified in expecting that the Bank of Canada should act as a stabilizing force in the economy and not as one whose actions tend to exacerbate our economic and financial difficulties,” they protested. Commercial bank presidents were equally unhappy.
In response, Mr. Coyne made speeches across the country, warning that foreign (read American) investment was propping up an otherwise unsustainable standard of living. “We have for at least five years been living beyond our means on a grand scale,” he declared. The governor recommended spending cuts and import restrictions, which he acknowledged would lead to a lower standard of living.
Mr. Coyne’s recommendations flatly contradicted the government’s fiscal policy and in any case were far beyond his purview. His claim that Canada was “on a road to ruin,” was simply an attack on the government.
The obvious response for Mr. Fleming would have been to announce that Mr. Coyne would not be reappointed when his term expired at the end of 1961. But cabinet was baying for his head, and Mr. Diefenbaker was convinced that the governor “was an unregenerate Grit,” as he said in his memoirs. In the spring of 1961, Mr. Fleming and Mr. Diefenbaker agreed the governor had to go.
Claiming that Mr. Coyne had arranged to have his pension increased without consulting cabinet, and citing their many disagreements on fiscal and monetary policy, Mr. Fleming demanded the governor resign. The pension-padding claim was false and foolish, and gave Mr. Coyne a reason to refuse.
In June, the bank’s board of governors asked for Mr. Coyne’s resignation. He refused again, declaring “slander on my integrity I cannot ignore or accept.” The entire country was gripped by the conflict. The Chicago Daily News said Mr. Coyne, “Canada’s most controversial figure,” was “on the verge of achieving international status as a row-provoker.” The opposition parties were seated at a feast.
On June 20, Mr. Fleming introduced a one-sentence piece of legislation: “The office of the Governor of the Bank of Canada shall be deemed to have become vacant immediately upon the coming into force of this act.”
The government used its large majority to force the bill through the House of Commons without hearings. But the Liberals controlled the Senate, and they called on Mr. Coyne to testify. He portrayed himself, and was seen by the press and the public, as a martyr. Having been given a chance to tell his side of the story, Mr. Coyne resigned the next day.
The Coyne affair was devastating for the Diefenbaker government, which appeared both incompetent and vindictive. The following spring, the largest majority government in Canadian history was reduced to a weak minority that collapsed within eight months, making Lester Pearson prime minister in the election that followed.
Ironically, the Coyne affair increased the bank’s independence. Mr. Fleming and Louis Rasminsky, the next governor, agreed to new rules that are still in place. Under those rules, the government of the day and the bank agree on a monetary policy, and the bank is then left to pursue that policy without interference.
The only way the government can force a governor’s resignation is by formally and publicly demanding the bank change course.
If he ever does become prime minister, Mr. Poilievre should think carefully about using that nuclear option. It has only been tried once, and it did not end well for the government.
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