PRESIDENTIAL PARTY

July 1 1961

PRESIDENTIAL PARTY

July 1 1961

James Coyne and the great debate IS CANADA POSSIBLE?

Few Canadians have been attacked as bitterly and from as many quarters as the governor of the Bank of Canada in 1961. Yet Coyne himself is little known, and his reasons for wanting to make his tight-money policies even tighter are little understood. Maclean’s Ottawa editor reports here on the man and his conviction : that Canadians must either reduce their scale of living or forfeit the right to remain an independent people

PETER C. NEWMAN

FOR THE FIRST TWENTY YEARS of its existence the Bank of Canada, the Crown-owned central bank that dominates Canadian finance, was a tower of silence. Its governor, an official appointed by the government for seven-year terms but not directly responsible to any cabinet minister, was a grey eminence seldom seen, even more seldom heard, and always a monument of prudence and restraint.

Outwardly the present governor of the Bank of Canada. James Elliott Coyne, tits the traditional pattern exactly. At fifty-one he is a coldly handsome, elegantly reserved patrician whose staff once discussed, before a Bank of Canada Christmas party, the wisdom of presenting him with an icicle bound in blue ribbon. (The idea was reluctantly abandoned, as apt but incautious.)

Yet this unlikely figure has become, over the past few years and especially the past few months, the centre of the hottest political arguments since the pipeline debate of 1956. Instead of being a remote and cloistered oracle, Coyne has blos-

somed into the most willing of public speakers (thirteen speeches in the last eighteen months, to audiences from Vancouver to St. John's). And his speeches, far from the conventional official model of dull discretion, have been firecrackers of controversy.

Businessman W. E. Williams, president of Procter & Gamble Company of Canada, said about Coyne in a recent public speech: 'Tm not saying he's a nut. but he's the most illogical person I’ve ever run into." Twenty-nine university economists, or about a third of all the academics in the field in Canada, last year signed a round-robin letter to the minister of finance. Donald Fleming, urging that he fire Coyne for incompetence and irresponsibility.

Fleming himself, challenged in the House of Commons to defend some of Coyne’s recent utterances, sent for a basin in which to wash his hands. “1 trust,” he said in a tone of injured innocence, "that I am not to be held responsible for what is said by the governor of the Bank of Canada.”

So far, the Coyne controversy has been limited

to relatively few

CONTINUED ON PAGE 41

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■„ In the Canada that Coyne proposes, we’d all be a great deal poorer. But we’d remain Canadians

people, for the excellent reason that the average voter doesn't understand what it's all about. His difficulty is complicated by the fact that this argument is actually two simultaneous arguments, one about the things Coyne does, the other about the things he says.

What he does, as governor of the Bank of Canada, is administer the monetary policy of Canada—known from time to time as a “tight-money policy.” a phrase that did much to beat the Liberals in 1957 and may yet do the same for the Progressive Conservatives. What he says is something quite different, and almost entirely unrelated.

Coyne’s message is that since World War II we have been living off the proceeds of foreign capital and with excessive imports, without worrying enough about how we'll pay the bills. Because we've covered the resultant deficit by

selling off an ever-increasing share of our natural and industrial assets to American investors, we now stand in danger of losing economic—and eventually political—control over our country.

Coyne contends that to offset this trend we must dam the flow of American capital into Canada, and start living on our own resources. He advocates transforming Canada into an insular, inward-looking economy, with strict governmental controls to keep economic ownership in Canadian hands. Experts who have analyzed Coyne's proposals have concluded that in the kind of Canada he envisages, business growth would be drastically cut. imported manufactured goods would be kept out by high tariffs, and we would all, as individuals, become a great deal poorer. But we’d remain Canadians. "We must,” Coyne insists, “learn to live within our means and exhibit the strength and will to do so.”

Apart from these and other suggestions about the direction of our future growth, the Bank of Canada governor has been making equally controversial decisions affecting current business development. Because of his obsession with what he calls the abominable wickedness of inflation. Coyne has directed the policies of the Bank of Canada in a way that has restricted the supply of money at a time when, according to orthodox economic theory, we should be fighting our way out of recession by heavy spending. His influence has kept long-term interest rates at least \Vi% higher than comparable rates on the U. S. money market, making

it more difficult for Canadian business to expand and create jobs.

E. P. Neufeld. the University of Toronto economist who is the country's leading academic specialist on central banking, has said that the recent actions

of the Bank of Canada have hurt rather than helped our present economic situation.

Other economists who have thoroughly investigated Coyne’s suggested future approach attack him with greater vigor.

David Slater of Queen’s University has stated flatly that the governor’s views arc based on "errors in diagnosis, and errors in judgment about how the economic system works.” Maurice Lamontagne, the chief economic adviser to Opposition

Leader Lester Pearson, has pointed out that “the direction Mr. Coyne would like the Canadian economy to take would lead our country to a dead end.”

At the heart of this increasingly bitter, quarrel has been the apparent contradiction of the stand taken by the Diefenbaker government. Finance Minister Fleming has pictured the Conservative cabinet as being constitutionally helpless before the governor’s discomforting attacks. This attitude is questioned by Ottawa constitutional experts, who insist that the Bank of Canada governor must resign if he cannot agree with the general policy the government desires him to implemeiu.' They claim that the fact Coyne is still in his job clearly indicates at least tacit approval of his policies. Coyne himself supported this interpretation, when he told a Commons committee in 1956 that if the government were displeased with the management of the bank “they could put in motion steps which would bring about a change in the management. At some stage in that process . . . the governor would have to resign.”

Coyne privately defies the economists who attack him as the practitioners of a dated science, inapplicable to the Canadian situation. He shuns the orthodox cures for our economic ills, because he believes we are suffering not from the boom-bust cycle of former years, but a much more serious malady that has gone beyond the point of self-correction. “Canada,” he says, "was established as a nation, not as a natural economic unit. The very idea of Canada implies nationalism at its root.”

He has been able to drum up little support for his views. Frie Kierans, the president of the Montreal Stock Exchange, did tell the Toronto Rotary Club that “at least we know what our problems are, and we owe the discussion to a courageous Canadian—James Coyne.” But the only actual, if unknowing. converts to the governor’s "living within one’s means” philosophy have been eleven Sons of Freedom Doukhobors, in the B. C. interior. They recently set fire to their automobiles, declaring they were getting rid of their "life of luxury.” On a more serious level, the respected Economist of London has noted: “Although Mr. Diefenbaker wears the mantle and employs the oratory of Canada’s prophet, a more truly prophetic voice has now been heard from Mr. Coyne."

Nearly all the economists and bankers who quarrel with the theories of the controversial governor eventually point out that "the absurdity of his views" is at least partly based on the fact that Coyne has never had any formal training in either economics or banking. At the University of Manitoba, he studied history and mathematics; at Lincoln’s Inn, in London, he read law. During a private dinner party given in Ottawa recently, when each guest was asked to rise and give his profession, Coyne said: “The bankers class me as a lawyer, the lawyers class me as an economist, and I’d hate to think what the economists class me as.”

Such modesty was hardly appropriate. Despite the lack of formal training in his specialty, Coyne has provided the intellectual toughness of many of the most daring Canadian economic experiments of the past two decades. Others got the publicity, but it was Coyne, as secretary of the Foreign Exchange Control Board in 1939, and later as deputy chairman of the Wartime Prices and Trade Board, who drew up the detailed regulations that played a major part in preventing World War II from

permanently damaging our economy. In these and other positions Coyne never disguised his distrust of the Americans. An Ottawa deputy minister, attending a confidential wartime seminar on U. S.Canadian relations, remarked that it was a pity American news media didn’t cover Canadian news more extensively; Coyne shot back: “As far as I’m concerned, the longer the Americans ignore Canada, the better I’ll like it.”

This violent nationalism was bred into Coyne by his family—a group that one contemporary describes as “a clan of plain-living, high-thinking, hot Liberals dedicated to the ideals of the Canadian nation.” His father, Mr. Justice J. B. ("Bogus”) Coyne of the Manitoba Appeal Court, was a leading member of Winnipeg’s famous Sanhedrin — an informal gathering of local intellectuals, including John W. Dafoe, the great Winnipeg Free Press editor, who met to ex-

pound the virtues of Canadian autonomy. Young Jim was made aware at almost every dinner-table conversation of the duties and sacrifices involved in being Canadian. He graduated from the University of Manitoba in 1931 with a brilliant record. George Ferguson, now editor of the Montreal Star, who sat on the selection board that sent Coyne to Oxford with a Rhodes Scholarship, remembers him as being so far ahead of the other candidates that the committee held one of its shortest meetings on record.

When he returned to Winnipeg. Coyne joined his father’s law firm for the only four years of his professional life spent outside public service. In 1936, Col. J. L. Ralston, then counsel for the Turgeon Royal Commission investigating wheat marketing, picked Coyne as his assistant. The commission happened to be touring the west at the same time as a Bank of Canada research team, and Coyne spent most evenings chatting with the central bank economists. It was here, in dusty prairie hotel rooms during long summer nights at the depth of the Depression, that the young lawyer first became fully aware of the economic problems involved in Canadian nationhood. He decided to devote his career to them. Coyne resigned from his increasingly lucrative law practice to become a $ 150a-month clerk in the Bank of Canadas research department.

A year later, Coyne was seconded from the Bank of Canada to be secretary of the Central Mortgage Bank, formed by the government to relieve private mortgage holders on the prairies. But the mortgage bank never functioned. On the day Hitler walked into Poland, its machinery w'as converted into the Foreign Exchange Control Board, charged with preventing dollars required for the war effort from leaving the country. Later he was sent to Washington as the Canadian Embassy’s first financial attaché, where he helped to draft the Hyde Park Agreement that set up a mutual defense production system.

Meanwhile the heavy demand for goods from a still immature industrial economy was creating severe inflation in Canada and Prime Minister Mackenzie King established the Wartime Prices and Trade Board to clamp a freeze on prices. Donald Gordon, then the Bank of Canada’s deputy governor, was named chairman. Coyne became his assistant, and later the board’s deputy chairman. Gordon became a hero, because he treated every situation with humor. Coyne, who had deliberately cut himself off from public contacts, came to be regarded as a furtive and unpleasant backstage influence. Ottawa reporters tagged him “Jesus E. Coyne,” and several commentators began to wonder in print why, as a 32-year-old bachelor, he wasn’t in uniform.

Coyne had actually been trying to join the RCAF for some time, but Finance Minister James Ilsley felt he was much more valuable in his Ottawa assignment. He was finally released in 1942. Overnight the man who as deputy chairman of the Wartime Prices and Trade Board had virtually been second in command of the Canadian economy found himself standing eight-hour watches as a security guard at the Portage la Prairie RCAF training base. He later topped his class of pilots, but at thirty-four was ruled too old for combat. Coyne returned to the Bank of Canada in 1944 and was appointed deputy governor in 1949. when Donald Gordon left to head the CNR. Five years later he succeeded Graham Towers in the bank's top job.

Although his $50,000 salary as Bank of Canada governor is $13.000 higher than that paid Canadian prime ministers. Coyne has acquired a reputation for being parsimonious to the point of stinginess. He drives about Ottawa in a fouryear-old Ford, a fact that raises eyebrows among visiting European central bankers accustomed to being chauffeured in discreet limousines. He follows supermarket advertising so closely that he knows which chain is selling cans of salmon a cent or two cheaper than its rivals. He uses $3.95 vest-pocket watches, which he discards when they stop running, and one acquaintance recalls a long lecture he once got from Coyne on the virtues of buying cardboard luggage.

Much of this penny-pinching is a result of Coyne's quarter century of adult life as a fastidious bachelor, with what one Ottawa hostess calls "an underdeveloped sense of social obligation.” He had few hobbies; although he belonged to the Five Lakes Fishing Club in the Gatineau, a fellow member swears that he never saw Coyne wet a line. Coyne preferred to sit in a boat, reading economic texts. He has always had a very active interest in Canadian art. though, particularly the water colors of David Milne.

Coyne has become much more gregarious since his marriage, four years ago, to Meribeth Stobie Riley, a gracious and beautiful Winnipeg widow. But he still gives the impression of being much

more concerned with ideas than with people. He has great difficulty establishing rapport, largely because his purposeful aloofness is based on nothing more than painful shyness. He's so afraid to take advantage of his position that he once hesitated to cash a cheque, when he found himself out of money, because his only means of identification was his signature, engraved into the lower righthand corner of every Canadian banknote. The honed brilliance of his mental equipment is often awkward to keep under control. He once listened to a Bank of Canada economist expound his pet theory for an hour, then cut him down with the remark: "I think that the

exact opposite of what you've been saying is nearer the truth.” His intransigency makes everyone uneasy. "Jim’s got an open mind, until he makes it up. Then it's closed forever,” says a colleague.

Part of Coyne’s present difficulties stem from the comparison inevitably made between his stormy term as Bank of Canada governor and the stewardship of Graham Towers, his predecessor. Towers, who since his 1954 retirement has become a director of some of the top business corporations in North America, was an unassuming but accomplished banker with an astonishing capacity for making Bank of Canada policies seem not only right, but inevitable. Unlike Coyne, who much prefers to stay barricaded in his Ottawa office, Towers enjoyed the semantic excitement of traveling to Toronto and Montreal for informal lunches with the senior officers of chartered banks. In such expeditions, he had the advantage of being considered by the private bankers as one of their own. Towers had been plucked out of his job as the Royal Bank’s assistant general manager by Prime Minister R. B. Bennett in 1934 to head the newly established central bank.

Limited supply equals value

The Bank of Canada was set up to offset the near collapse of confidence in the Canadian financial system brought about by the Depression. It was charged with regulating “credit and currency in the best interest of the economic life of the nation” and generally promoting “the economic and financial welfare of the dominion.”

It's not a bank in the sensé that it accepts deposits from individuals or makes loans to companies. The'Bank of Canada’s primary duty is to see that there is the right amount of money in existence at any given moment in the development of the country’s economy. Coyne once explained this function to a reporter, while holding up a dollar bill. “It’s remarkable.” he said, “how deepseated and unconscious is the public’s acceptance of paper money. Why does money have value? It’s certainly not because of the paper or what’s written on it. Not because it’s backed by gold — it isn’t. It’s because there’s only a limited amount of it. That’s why the supply of money must be subject to rigorous limitation and control — in other words, the currency must be managed. This management of the money supply is the Bank of Canada's main job.”

The bank achieves changes; in the money supply by increasing or lowering the funds that the Canadian banking system as a whole is able to lend and invest. It can do this because under the federal Bank Act, each chartered bank is required to maintain cash reserves with the Bank of Canada equal to at least eight percent of its deposits. If the Bank of Canada wants to increase the funds of the banking system it buys government securities in the open market, and pays

for them with cheques drawn on itself. These cheques are eventually deposited by the individuals who sold the government bonds at their own chartered banks. These banks, in turn, return the cheques to the Bank of Canada. The cheques are then credited to their accounts at the central bank — thereby increasing the cash reserves they have on deposit. Because this raises their reserves to more than the minimum requirement (eight percent) they can then increase their loan and investment operations.

If. on the other hand, the Bank of Canada wants to reduce the money supply, the whole procedure is simply reversed. The central bank sells government bonds from its portfolio in the open market and accepts in payment cheques drawn on the accounts the buyers maintain with the chartered banks. 1 he Bank of Canada charges these cheques against the cash reserves of the chartered banks on deposit with it — reducing their totals below the required eight percent level. To bring up their reserve ratio, the chartered banks have to increase their cash deposits with the central bank, thus slowing down the rate at which they can lend money to their customers.

Although this kind of money management is the bank’s most important economic function, only the top handful of its thirteen hundred employees are concerned with directing the country’s monetary policy. The bank is also the federal government’s fiscal agent, a task that involves, among other things, the issue of government bonds and the handling of cheques addressed to the Receiver General. It also distributes new Canadian banknotes and destroys tattered ones. I.ast year, it placed 198 million pieces of paper money worth more than a billion dollars into circulation through the chartered banks, and burned 191 million worn-out notes in its three basement incinerators. One job of the governor is to decide how much paper currency should be in circulation.

To do this, he must study the economy carefully enough to form an estimate of the velocity with which the banknotes will be changing hands. Because of Christmas buying, for example, the amount of paper money printed for distribution in December last year was increased by SI28 million over the output for February I960, a low spending month.

These and other decisions are of course taken by the governor in consultation with his many experts. But the final choice is always his own. The governor even has the power to overrule the decisions taken by the bank's board of directors — a body of twelve businessmen who meet seven times a year — although such a veto has lo be referred to the government for confirmation or disallowance.

The relationship between the Bank of Canada and the federal government has always been touchy, probably because any institution that has the power to create money is naturally subject to political pressures. In general, when Bank of Canada decisions have been popular, governments have gladly accepted the responsibility for helping to formulate them: when they have caused controversy. the politicians have sternly pointed to the bank's antiseptic independence.

C. A. Dunning, the Liberal minister of finance in 1936. made the issue of government responsibility for Bank of Canada decisions clear when, during a House of Commons debate, he stated: "In the long run. the bank in the performance of a vital sovereign function must be responsible to the sovereign will expressed through a government. There cannot be

two sovereigns in a single state.” T L. Ilsley. a successor to Dunning, further strengthened this view, when he observed that “the monetary policy w'hich the bank carries out from time to time, must be the government’s policy.” Douglas Abbott, the next Liberal finance minister, was even more blunt. “The government,” he said, "if it were not satisfied with the action taken by the governor of the Bank of Canada, w'ould have to change the management.”

When Walter Harris, Abbott’s successor, during a 1956 Commons debate on interest rates, retreated from this hard position, he was immediately attacked by Donald Fleming, then Opposition financial critic, who scornfully accused the Liberal government of denying its responsibility for what the Bank of Canada w'as doing. "The government,” he said, “cannot shed its responsibility for full fiscal policy in the broadest sense of the word, and that must include the actions of the Bank of Canada.” But Fleming’s assumption of power has dramatically reversed his opinion. “The Bank of Canada is not responsible to the government,”

he bluntly told the House of Commons last December.

Some federal politicians believe that in spite of Fleming's rejection of Coyne’s extreme economic nationalism, the minister of finance does lean on Coyne’s tight-money philosophy to help urge financial orthodoxy on his fellow cabinet members, many of whom would prefer more politically attractive free-spending policies. One clue to the relationship between Fleming and Coyne leaked out of a private dinner for bond salesmen given in Ottawa two years ago. "When the history of these times is written.” Coyne is reported to have told the investment dealers, "and the whole story of the part that Donald Fleming played is known, the people of Canada will realize their debt to him."

Despite any sympathy that may exist between Coyne and the government, he’s become such a political liability that not even his best friends expect he’ll be reappointed beyond his seven-year term, due to expire at the end of this year. Feelers for a successor are known to be out in the Toronto and Montreal financial communities. The loquacious governor meanwhile continues to preach his lonely sermon.

"If we do not effectively change the trends of the past, we shall drift into an irreversible form of integration with a very much larger and more powerful neighbor." he summed up recently. "1 do not believe this is what Canadians want. For it means surrendering the very idea of Canadianism, the dream of Canada which gripped the imagination of Sir John A. Macdonald. Georges-Etienne Cartier, and so many Canadians of their time and since." -k