AS GOVERNOR of the Bank of Canada from 1987 to 1994, John Crow was one of the most controversial central bankers the country has had. He was severely criticized for using high interest rates to squeeze down inflation. Yet during his tenure, rates ranged from 14.05 per cent in 1990 to 3.87 per cent in early 1994, while inflation fell from 6.9 per cent to zero. In his new book, Making Money: An Insider’s Perspective on Finance, Politics and Canadas Central Bank, Crow discusses those days and the nature of the bank’s relationship with government. Now an international financial consultant, he spoke with National Business Correspondent Katherine Macklem.
What were your priorities as governor?
My main one was to give a clear sense of direction to monetary policy. Where should we be going over the long term? And in particular, what should be the view on inflation? People’s expectations about inflation have a lot to do with everything else that goes on in the economy.
Your decisions as governor had a huge impact on Canadians: whether they could buy a house, whether they might lose their job. Did that enter into your thought process?
Well, that’s why it’s very important to have a clear framework for what you’re doing, because you can’t be taking decisions on the basis of how you feel in the morning, or on the basis of caprice. That’s why you struggle with the question of the framework you’re putting into effect. I’ve been asked, do you have a mortgage? If you had a mortgage, you wouldn’t do this, you know?
That’s a fair question, isn’t it?
Yeah, a fair question and not a fair question. Should every governor have a mortgage? OK, you could extend that: should their salary depend upon performance? How do you measure performance?
I have argued many times, and I believe it, that the policy was not a high interest rate policy, but a low interest rate policy. But you had to take the right time frame. People had to expect no inflation, or price stability, before you had low interest rates.
How would you describe the relationship between the governor and the finance minister?
There’s a formal relationship which is set out in the Bank of Canada Act. Essentially, it says that the governor and the minister will consult on monetary policy and its relationship to economic policy generally. It’s an interesting question what “consult” means. Consult does not mean taking instructions. It means discussion. It means listening hard. And, hopefully—we’re all reasonable people—reaching agreement.
If there’s disagreement, then the minister may issue a directive. There’s never been a directive, but its availability gives the executive arm, i.e. the government, not Parliament, a clear way of deciding policy. So it’s an interesting, although fairly intricate, set of relationships, checks and balances.
What about the informal relationship?
It’s a careful relationship. The key part is the regular discussion between the minister and the governor. In my time, we would try to meet weekly. I’m not going to discuss those meetings.
Was there enough independence for the bank when you were governor?
Oh, there was enough independence. You want to discuss independence in the abstract. Independence for what? Why do you have a central bank which is, quote, “independent” in the first place? Why can’t it be a department of government, with a minister, and fight this out in cabinet? Some people think it should. There are two sides to this, and there are trade-offs to some degree. One is the commitment of government on monetary policy, and the other is the degree of independence of the Bank of Canada to do, quote, “the right thing.” This links to how clear the government is prepared to be on what it wants to do about the quality of money.
I think most people who have done this work would agree that we want clarity in terms of mandate. It clears the air about what the bank should be doing. And this is where the inflation targets we negotiated came in. They’re pretty transparent.
After the Liberals took over in 1993, there was a lot of discussion about whether you’d be appointed to a second term. Did you want one?
I was prepared to undertake a second term, but not under any circumstances. We had discussions, the minister [Paul Martin] and I. He pointed out that he wanted the inflation targets to go ahead with the current numbers, but without any reference to what happened over the longer term, in terms of price stability. I could see no good reason why that should be dropped. That was the issue for me.
In the book, you seem to show disdain for politicians. You mention “leading from behind.”
That is the political preference. Understandably. You want to have everybody supporting you. I would argue that that’s why they’ve tended to have, in a sense, an independent central bank.
As in, “Let the governor make the tough decisions?”
But not too independent, clearly?
Not too independent. Napoleon made a famous remark about the Bank of France. In 1806, he said he wanted the bank in the grasp, but not the grip, of the government. 171
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