The Bean Counter

Inflation Fighter

December 13 1993
The Bean Counter

Inflation Fighter

December 13 1993

Inflation Fighter

It is a decision that Finance Minister Paul Martin is taking his time about—carefully weighing the future of John Crow and understanding very well that it is a decision as much about his future and the future of Jean Chrétien’s Liberal government as it is about the fate of the 56-year-old economist who has run the Bank of Canada for the past seven years and would not mind running it for another seven. There are decisions that come along in the life of a government that help to define it, and the matter of whether to reappoint Crow is one of them, for Crow is as much a symbol as anything else. “He has been one of the sole beacons of financial rectitude and economic sense,” says Tom d’Aquino, president of the Business Council on National Issues and one of Crow’s biggest supporters.

The decision is not one that Martin can toy with for very long. Crow’s term as governor, with a salary in the range of $168,800 to $253,200, expires on Jan. 31. Last week, a special committee of the bank’s board of directors, responsible for the appointment, informally advised Martin to keep Crow on. “The clock is ticking,” said Fred Hyndman, an insurance broker from Charlottetown who chairs the committee. The Bank of Canada Act says the appointment of a governor is made by the board with the approval of cabinet. But, says Hyndman, this being one of Canada’s most crucial institutions, there can be no surprises and no. confrontations. What this means in practice, he explains, is that the process leading to the announcement, which will probably not come until after the New Year, follows a careful minuet performed by Martin, the committee and Crow himself. But more than a minuet, the dealings seem to resemble a Victorian courtship ritual where expres-

The Liberals have to decide soon whether to keep John Crow at the head of the Bank of Canada

sions of interest can never be stated outright, but are broadcast in more subtle ways.

The signals so far suggest that Crow wants to stay. He has not campaigned, which would be unseemly, and bank sources say he deliberately kept a low profile during the recent election campaign. From the government side, there has been frank appraisal. “I’ve had a number of discussions with Mr.

Crow," Martin told Maclean's last week. "I think that I've got to have a couple more conversations." But there have also been ver bal glances from Martin and other top Liberals that indicate more than passing interest and a willingness to forget alleged transgres sions of the past "I am still hoping, and to some degree expect ing, that they will reappoint Mr. Crow," d'Aquino said. The reason for d'Aquino's caution is that Martin and the Liberals were critical, sometimes sharply so, of Crow as recently as 1991 when interest rates were high. "My criticism really dated back two years ago,” Martin said. “I think the monetary policy followed over the past year has been the right monetary policy.” The two men have met a few times since the Liberals took power in early November, as they are required to do, for it is a relationship governed by the Bank of Canada Act. The first meeting occurred not in Ottawa but in Windsor, Ont., where Martin was keeping a hospital vigil at the bedside of his dying mother, Eleanor. The plane carrying Crow broke down en route, forcing the governor to land in London, Ont., 200 km away, and complete the journey by bus. So far, says Martin, their meetings have been cordial: “We’ve disagreed on some things, we’ve agreed on some things and in areas where we disagreed, we went at it hammer and tongs, but they were not vicious disagreements. They were just basically disagreements between two people who differed on a view.” The differences would be differences of degree, not substance, for Martin believes as firmly in the goals of a stable dollar and low inflation as does Crow. “I think that low inflation is an essential ingredient to keeping interest rates low,” he said the day he was sworn into cabinet.

That the Liberals are even thinking about reappointing Crow might startle those who followed political debates back in 1990, when the Bank of Canada rate reached 14.05 per cent and stayed above 12 per cent for 50 of the 52 weeks and above 13.5 per cent for 17 weeks. “People’s businesses are being ruined by your very odious policies,” Doug Young, then a Liberal MP and now transport

minister, yelled at Crow during a meeting of the Commons finance committee that spring as Canada teetered on the verge of the recession that many blamed on Crow’s tightfisted pursuit of low inflation. There were also wellpublicized tiffs with Diane Marleau, now health minister, and Herb Gray, now solicitor general and government house leader. Doug Peters, now a junior minister of finance with an office beside Martin’s on the 21st floor of the finance department building in Ottawa, but then chief economist for the TorontoDominion Bank, was also a prominent critic, blaming Crow and Conservative economic policies for squeezing inflation at tremendous economic cost. During the 1990 Liberal leadership race, Martin also joined in, saying the government should order Crow to reduce interest rates even if it meant forcing the governor’s resignation. But Liberals were far from alone

then in attacking Crow. Tory MPs did it, Don Getty, then Alberta’s Conservative premier, did it, as did the Canadian Manufacturers’ Association, among many others.

But having paid the price to achieve what is now one of the lowest annual rates of inflation in the industrialized world, 1.9 per cent, there are many who argue that Crow should not be jettisoned just when his policies are ready to bear fruit. Not surprisingly, Crow is in that group, for he has never been shy about asserting the correctness of his own views. In a speech to bankers in Bombay late last month, he said the decline in interest rates has

prompted some to wonder if his policy had changed. “Not so,” he declared. “It’s just that one of the eventual results of a policy oriented to price stability is... low interest rates, not high ones.” The business community in Canada and abroad has enthusiastically endorsed Crow and wants to see him stay on. “Replacing Crow can only be bad,” said Raymond Tighe, a currency trader at LIT America in New York City. “It sends a negative message about inflation.” Added Anita Lauria, an economist at Salomon Brothers in New York: ‘There would be a severe backlash now if Crow is not re-appointed.”

Under Crow’s tenacious direction, the Bank of Canada has been elevated in international financial circles alongside the German Bundesbank as a paragon of anti-inflation virtue. So strong is his reputation that his central bank colleagues

from 10 leading industrial nations recently affirmed their high regard for him by electing him their chairman—the first time someone from outside Europe has received the post. But Crow has come to his position of banking orthodoxy by a most unorthodox route. His patrician self-assurance is not inherited but self-taught: born in London’s East End, he is the child of working-class parents. He came to Canada in 1973 from the International Monetary Fund, where he saw up close the lessons of economic failure in Latin America, involving huge public debts, rampant inflation and devalued currencies. And while it was Michael Wilson, the architect of Tory economic policies in the 1980s, who gave the nod to make him governor, Crow rose at the bank

from the research department to deputy governor while the Liberals held power.

But not all of Crow’s critics have gone quiet. “We can’t just let bygones be bygones,” says Mike McCracken, president of Informetrica consultants in Ottawa, who notes that real interest rates, taking into account inflation, are still higher in Canada than in the United States. Economist Ernest Stokes at the WEFA Group in Toronto argues that Crow’s fixation with inflation led to the recession and “destroyed Ontario in the process.” Crow’s opponents in the Bank of Canada for Canadians Coalition, which groups businessmen and academics, have even enlisted support from Paul Samuelson, a Nobel laureate in economics and professor emeritus at the Massachusetts Institute of Technology in Cambridge. Samuelson contends that Crow has been too dogmatic in his fight for price stability and that central banks must take into account other economic goals. At Martin’s meeting last week in Halifax with provincial finance ministers, the NDP governments in Ontario and British Columbia argued openly against reappointing Crow. That view also has some support in the Liberal caucus. Toronto MP John Nunziata said reappointing Crow would undermine the government’s credibility. “We made it a mission to fight the Tories for their singleminded fight against inflation and that was John Crow’s policy,” he said pointedly.

But critics might find little reason to cheer even if Crow is nudged aside. “It would have to be somebody who would be concerned about the value of the currency and low inflation,” Martin told Maclean’s. “So the governor of the Bank of Canada is going to have to be cut out of that mould in any event.” In effect, the minister conceded, a new John Crow would probably look a lot like the old John Crow.