Don’t mess with the bank

Most of us are a little fuzzy about what our central bank actually does. It speaks only occasionally, and in the opaque language of a Delphic oracle. But we all know that it is powerful, essential to our financial system and has a reputation for absolute integrity.

Strangely, in most countries they are an invention of the 20th century, with the exception of the Bank of England. The United States Federal Reserve was founded in 1913, and our Bank of Canada two decades later. Since their creation, they have taken on more and more policy roles, especially since the crash in 2008. At first they were simple guarantors that there was enough money printed, and acted as “lenders of last resort.” Today they are guardians against inflation, set interest rates, and attempt to combat unemployment and even climate change.

The bank and its governor are as central to our financial system as the Supreme Court is to law. They can perform this essential role only so long as they are seen to be competent — and entirely independent from politics. Canada’s international financial reputation depends on the probity and prudence of the bank.

Conservative leadership candidate Pierre Poilievre pretends not to understand any of this; he says he will fire the governor and take the bank under political control by making specific policy demands of it. This is not only dangerous nonsense — it is a window into how completely irresponsible he is, and how clearly unfit he is to be party leader, let alone prime minister.

John Baird, his improbable campaign co-chair, should sit him down and tell him a story about the last Conservative prime minister who played with such fire. John Diefenbaker did not like James Coyne, then head of the central bank, so he fired him. The damage it caused Canada and his party contributed to Dief’s defeat.

But the backstory is more interesting than the outcome. In the late 1950s, Canada was on one of its nationalist flights of fantasy. We snarled at the government and corporate Canada for selling out our natural resources to the U.S. The delusion that our prosperity did not require American capital to continue struck members of all three national parties, along with the governor of the Bank of Canada. Coyne was also horrified by Tory spending, deficits and disinterest in inflation.

Coyne was ignored, and was soon at daggers drawn with the Diefenbaker government. Losing the private debates on these policy essentials, he went on a speaking tour, severely attacking the government. Now this is a no-no for a central banker. After some negotiations, he agreed to stop speaking out if they would put some limits on the pace of spending. Dief was so angry at being demeaned publicly he refused, demanding Coyne’s head. He got it on July 13, 1961.

Coyne’s “resignation” caused the Canadian dollar to fall, along with markets. Grandees of the finance world in Toronto, Montreal and New York privately expressed their horror at this political intervention. Few Canadian or American financial bosses liked Coyne or his ideas, but they hated the idea of a central bank directed by politicians even more. A year later, Diefenbaker lost his massive majority, a few months after, his government.

The Fraser Institute — Canada’s leading hard-right think tank — recently released a harsh attack on the bank and its expanding mandate. It is not unreasonable to wonder how independent a bank is when it accepts a government’s determination that it should not just reduce inflation and protect the currency, but fight unemployment and climate change as well.

The Trudeau government has walked pretty close to the line by publicly demanding this of the bank. But no one with any understanding of how essential the independence of the bank is to Canada’s reputation would call for the governor’s head. It is almost a certain disqualifier for anyone seeking to lead the country, given its recklessness.

Then again, peculiar Pierre revels in his recklessness.

The bank and its governor are as central to our financial system as the Supreme Court is to law. They can perform this essential role only so long as they are seen to be competent — and entirely independent from politics