Remember This? The Coyne affair

OttawaMatters.com, in partnership with the Historical Society of Ottawa, brings you this weekly feature by Director James Powell, highlighting a moment in the city's history.

13 July 1961

For six weeks during the late spring and early summer of 1961, Ottawa, and indeed the whole of Canada, was gripped by an unedifying public fight between the Conservative Government of John G. Diefenbaker and James E. Coyne, the governor of the Bank of Canada.

The battle of words got downright nasty. At one particularly low point in the House of Commons, Coyne was called “an anarchist,” and “a communist in sheep’s clothing” who should be jailed for “the misappropriation [of funds] approaching larceny.” But Coyne gave as good as he got, calling Diefenbaker “an evil genius” who had acted with “unbridled malice and vindictiveness.”

The verbal punch-up, extensively covered in the nation’s press, was the culmination of months of growing unhappiness on the part of the Diefenbaker about Coyne.

In the spring of 1961, the Bank’s board of directors on behalf of the government decided not to renew Coyne’s seven-year term as governor which was to expire at the end of that year. But when Diefenbaker learnt the size of the pension Coyne would receive, he became enraged, and tried to force the governor out immediately on the dubious pre-tense that Coyne had unjustifiably enriched himself by not vetoing a large pension increase granted earlier to him (and subsequent governors) by the Bank’s Conservative-dominated board of directors. In Parliament, Diefenbaker said that Coyne “sat, knew, listened, and took.”

But Coyne refused to go quietly, incensed by the slander upon on his personal integrity as well as that of the Bank.

At the end of May 1961, the Diefenbaker government introduced Bill C-114, a terse one sentence draft act declaring the position of Governor of the Bank of Canada vacant.

The bill was passed overwhelming by the House of Commons where Diefenbaker had a huge majority. However, after the Senate Standing Committee on Banking and Finance had listened to Coyne’s side of the story, and exonerated him from any wrongdoing, the Liberal-dominated Senate defeated the bill.

Having had his day in court, and his name cleared, Coyne resigned. The Ottawa Citizen reported that “Mr. Coyne defended himself gallantly, fearlessly and courageously. He had not fought for personal interests but for principles. Any man of honor would have acted in the same manner.”  Deputy Governor Louis Rasminsky replaced Coyne as governor ten days later.

The seeds of the controversy were sowed years before.

Coyne had been appointed governor by the previous Liberal government of Louis St-Laurent on the retirement of the Bank of Canada’s first governor, Graham Towers, at the end of 1954. Coyne, a lawyer by training and a Rhodes Scholar, was a brilliant, upright, and austere man. He had joined the bank in 1938 in the Research Department and rapidly rose through the ranks. He was only 44 years old when appointed governor. A man of strong views, he rubbed a lot of people the wrong way; many both inside and outside the Bank found him difficult to work with. Indeed, Coyne was sometimes an irritant to the Liberal government that had appointed him. He also had many critics among professional economists who disagreed with his views on monetary policy and the economy.

In the spring of 1957, a minority Conservative government under Diefenbaker was elected, partially on a populist platform that had denounced the prevailing tight monetary policy of the Bank of Canada. At that time, the Canadian economy was experiencing rising inflation which touched 3.2 per cent in December 1956, up from 0.5 per cent the previous year.

Rising interest rates, however appropriate given the circumstances, were a new phenomenon in Canada, and discommoded many.

But following the election, Conservative criticism of Coyne ended; indeed, Donald Fleming, the new Finance Minister, supported the Bank, speaking of the “lurking menace of inflation.” The volte-face of the government was widely commented on in Parliament. The change in government opinion was facilitated by an easing of monetary policy by the Bank as the economy slowed and inflationary pressures ebbed. The Conservatives were quick to take the credit for lower interest rates.

The outward calm was short-lived.

In the midst of the early 1958 election campaign which saw the election of a massive Conservative majority government, Fleming took Coyne to task for denying in the Bank’s just-released 1957 Annual Report that the Bank had ever pursued a tight monetary policy; Coyne called it a “sound” monetary policy.

The public exchange of words, a prelude of things to come, became so heated that there was press speculation that the government would seek Coyne’s resignation. Again, nothing happened. Relations improved considerably with the “Conversion Loan of 1958,” a mammoth debt-management operation conducted by the Bank of Canada as agent for the government under which the maturities of bonds that the government had issued during the war were extended. While the Conversion Loan was criticized by many at the time, the government thought Coyne had provided sterling service.

The détente did not endure.

In late 1959, Governor Coyne, on the suggestion of the Bank’s board of directors, began a country-wide speaking tour on the state of the Canadian economy.

His key message, which was well received in the press, was that Canada was living beyond its means. Coyne, an ardent Canadian nationalist, was especially concerned about growing foreign domination of the Canadian economy as Canadians borrowed from abroad to cover the country’s widening trade deficit. He argued that unless steps were taken to boost domestic savings and to curtail excessive consumption, Canada was on an unsustainable and dangerous track, something which only the government could fix.

Needless to say, this message did not play well with the Diefenbaker and his colleagues who saw only limitless, sunny horizons for Canada.

It was this speaking campaign more than anything else that got under Diefenbaker’s skin that led to the decision to remove Coyne from the Bank’s helm. Diefenbaker interpreted Coyne’s remarks as a direct attack on his government. In his memoirs, the prime minister called the governor “an unregenerate grit” (i.e. a Liberal).  Some observers of the Coyne Affair attribute Diefenbaker’s desire to oust Coyne as a dispute over monetary policy—an expansionist government being thwarted by an ultra-restrictive central bank.

However, the government did not publicly or privately seek a change in Bank policy during the 1959-61 period despite widespread criticism on the part of academic economists that monetary policy was too tight.  Even as late as January 1961, Finance Minister Fleming took pride in the relative stability of prices, citing them as a contributor to “real gains achieved by the economy.” All the government did was distance itself from higher interest rates, now saying that monetary policy was the responsibility of the Bank not the government.

There was little doubt that Diefenbaker would win his battle with Coyne. But it was a pyrrhic victory.

Peter Newman, in his book Renegade in Power on the Diefenbaker years, called the “successful attempt to dislodge James Elliott Coyne, the Bank’s troublesome governor,” Diefenbaker’s “least admirable crusade of his career.” Public opinion was squarely on the Governor’ side. In the general election the following year, the Conservatives were reduced to a minority government, its loss of popularity in part due to Diefenbaker’s unfounded, personal attacks on Coyne.

The impact of the Coyne “Affair” was lasting.

On the positive side, responsibility for monetary policy was clarified—something demanded by Louis Rasminsky as a condition for assuming the governorship, and which was subsequently endorsed by a Royal Commission (the Porter Commission) into the state of banking and finance in Canada.

Legislative changes made it clear that the government was ultimately responsible for monetary policy, with the Bank of Canada responsible for the day-to-day conduct of policy. In the event of an irreconcilable policy disagreement, the government would issue a public directive to the Bank—an act which would cause the governor to resign.

The Porter Commission also concluded that the controversial pension increase awarded to Coyne was entirely justified. On the negative side, a chill descended over the Bank’s communications strategy. Governor Rasminsky refrained from speaking publicly on economic issues for two years. As well, according to John Crow, governor of the Bank from 1987-94, the “trauma” suffered by the Bank may have dampened its willingness to fight inflation during the 1960s and 1970s when inflationary pressures began to get out of control, and which later became so costly to subdue.

After the Coyne Affair, the Diefenbaker government tried to lower the value of the Canadian dollar as part of its expansionary program to boost economic growth.

The attempt ended in tears as the currency, already weakened due to the Government’s fight with its central bank, dropped like a stone in financial markets. To arrest collapsing confidence, the government in 1962 dramatically tightened fiscal and monetary policy and introduced temporary import surcharges to reduce Canada’s trade deficit, a policy ironically recommended by Governor Coyne as a way to curb foreign borrowing.

The government also suffered the embarrassment of having to go cap in hand to the international community for aid in stabilizing the dollar’s value, borrowing more than $1 billion (roughly $8 billion in today’s money) from the International Monetary Fund, the U.S. Export-Import Bank, the Federal Reserve and the Bank of England. The dollar’s value was fixed against the U.S. counterpart at U.S$0.9250, down from above parity at the time of Coyne’s resignation. It remained fixed at this rate until 1970.

The Diefenbaker government was ousted in the 1963 general election by Lester B. Pearson’s Liberal Party. Other than his involvement in the failed attempt to establish a western Canadian bank during the mid-1960s, James Coyne left the public eye following his resignation from the Bank of Canada. He died in 2012 at the age of 102.