Rogue Tory
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During the summer, facing renewed signs of economic decline, cabinet also authorized increases in funding for job training and winter housing construction. The prime minister summoned officials from Labour, Finance, and Trade and Commerce to Harrington Lake to advise him on the economic outlook and employment policy without the presence of their ministers. “No doubt a prime minister can do such things if he chooses,” Fleming reflected caustically, “if he is unwise enough to sidestep his ministerial colleagues.” When Diefenbaker proposed a cabinet committee that did not include the minister of finance to recommend new measures of economic stimulus, Fleming wrote to the prime minister declining any further responsibility for fiscal policy and threatening resignation. Diefenbaker quickly telephoned to insist, “I regard you with feelings bordering on idolatry. I’m sorry this has happened … I promise you this will never happen again.” Fleming stayed on in an uneasy standoff - still, he believed, the cabinet’s stern and necessary voice of financial prudence.74
Following three by-election defeats and one victory in October, Diefenbaker called the House of Commons back in November 1960 for an unusual autumn session to meet the unemployment crisis.75 The session lasted more than ten months. The government introduced a range of measures of vocational training, public works, university capital grants, and export financing, capping it all with a supplementary budget just before Christmas. In it, a chastened Donald Fleming sought to explain the economic downturn - which he blamed on American and European decline and a fall in world resource prices - and the prospect of a substantial budget deficit. He offered a series of business tax incentives and predicted a new target deficit of $286 million. Privately, Fleming had opposed a new budget because “tactically it gave the appearance of emergency to the government’s program. I thought that Diefenbaker was unnecessarily and prematurely over-reacting to a downturn in the economy. Perhaps this led us to shoot our bolt too soon.” But once committed, he was as smugly satisfied with his performance as ever.76 The Liberal opposition attacked the budget broadside, while the CCF criticized its failure to bring down interest rates, expand the money supply, or reduce the foreign exchange premium on the Canadian dollar. In January the government majority carried the budget resolution with ease, but the mood of political anxiety, disenchantment, and a cabinet at odds with itself lingered. None of the government’s measures seemed likely to have much impact on the unemployment figures.
For months observers in the press and parliament had pointed to signs of strain between the governor of the Bank of Canada, James Coyne, and the ministry. Coyne had been appointed in January 1955 to a seven-year term, which would expire at the end of 1961. He held office “on good behaviour,” and could only be removed for cause by an act of parliament. He was highly articulate, persuasive, and confident - even cocky - in manner. Fleming soon became aware, as minister of finance, that Coyne did not enjoy easy relations with the chartered banks. The bank’s restrictive credit policies were a common subject of public complaint during the 1957 and 1958 election campaigns. Diefenbaker was henceforth convinced that Coyne was one of the enemy within. Coyne’s dedication to tight money and a low inflation rate, he believed, was not only cruelly indifferent to human needs but subversive of Conservative policy.77 Fleming shared Diefenbaker’s anxiety about Coyne’s abrasive and independent ways, but lacked the prime minister’s distrust, and was determined to seek his cooperation. Fleming, like Diefenbaker, was concerned about high interest rates. After the confusions of the 1958 conversion loan, he first drew Diefenbaker’s attention to the bank’s high interest rate policy in August 1959 when he expressed his “deep concern” that it had reached an all-time record of 5.98 percent. Fleming promised that he would “review the situation intensively” with the bank.78 Within days the prime minister had received complaints from a Vancouver broker, Norman Whittall, that the bank was destructively deflating the economy and disorganizing the money markets. “The time has come,” Whittall demanded, “for you to decide whether the cabinet or the Bank of Canada is to control Canada’s financial policy.”79 Gowan Guest passed on the correspondence to Fleming with the comment, “Mr. Diefenbaker indicated an increasing concern about the current monetary situation, and an increasing awareness of comments of this kind.”80
Diefenbaker also sought the advice of Leslie Frost, who was closely in touch with the Toronto financial community. Frost responded “with no holds barred.” He expressed his “alarm and dissatisfaction,” noting that there was “an increasing lack of confidence in the Governor of the Bank of Canada and the policies followed by that institution.” The bank’s policy in the market was not one of leadership but of drift, “something after the fashion of a ship without a rudder.”
My investigations have led me to the belief that there is a widespread lack of confidence in the capacity of the Bank of Canada, including its Governor, to handle the present situation … My dealings over many long years with the banks and financial institutions have shown that they are like all human beings - they require strong and positive leadership. Confidence in the financial structure is a nebulous thing easily undermined and in many ways hard to restore.
…Should the whole economy of this country be dependent upon the unrestricted and uncontrolled decision of one man?81
Fleming arranged for the governor to meet with Frost, but Coyne apparently refused to discuss his policies with the premier. Fleming concluded that “the result was so bad that it would have been better if the meeting had never been held.” The minister then arranged a meeting between Coyne and a group of ministers, where he judged that “Coyne handled himself well.” But soon afterward Alvin Hamilton and George Hees, among others, urged Fleming “to remove the restraining hand of Coyne from the economy” in order to encourage expansion. Fleming pointed out that the government could not fire the governor: “I urged patience on my colleagues and others, and did my utmost to live with a situation which appeared to have become insoluble. I endeavoured to maintain as personally friendly relations with Coyne as his stiff, blunt, unaccommodating nature would permit.”82
From the autumn of 1959, Coyne began to accept public speaking engagements across the country, initially at the suggestion of members of his board, to explain the bank’s position in the “tight money” controversy. “It was clear to me,” he recalled, “that both my Board of Directors and the Minister of Finance were solidly in favor of the kind of monetary policy which the Bank of Canada was carrying out under my management.” Coyne could cite speeches of the prime minister and the minister of finance on “expansion without inflation” in support of that view. Fleming would not admit as much - or turned the claim around: The first of Coyne’s speeches, he wrote, were “interpreted as being in accord with my declared aim to balance the budget.”83
The latent conflict took on a sharper edge just before the budget of 1960, when Coyne suggested in his annual report that Canada was expanding too fast and living beyond its means, thus weakening its ability to meet the next recession. Gordon Churchill responded in the House in defence of high spending and a deficit trade balance. The Alberta back-bencher Eldon Woolliams brought cheers from the Conservative ranks by asserting that “we would rather listen to the optimism of the Minister of Trade and Commerce than to the statements made by Mr. Coyne that we have to tighten our belts and things are not so good in Canada.”84 Robert Duffy commented in the Globe. “In the lineup as it now appears, we have Jeremiah on the one side (let us not say left or right) in the person of Governor James E. Coyne … Opposing him is Pollyanna, the Minister of Trade and Commerce. Somewhere between them is the juggler, Finance Minister Fleming, and in the background, Prime Minister Diefenbaker, mystified. Mr. Fleming stands as close to Mr. Coyne as Mr. Diefenbaker is to Churchill.”85 For over a year, Fleming kept his silence, even when twenty-nine university economists publicly denounced Coyne in December 1960. “I was unable to discern,” he later wrote, “whether the signatories were stressing the adverse balance-of-payments situation or the ques
tion of money supply.” At the same time, Fleming incorporated several of Coyne’s proposals for limiting foreign investment in his supplementary budget.86
Coyne’s visibility and independence were becoming an embarrassment. On December 1 the party’s dean of the House, Earl Rowe, offered his comments in a letter to Fleming.
It appears to me that Mr. Coyne is talking too much. He speaks as one independent of either Party. His remarks are hurting our Party, our Government and our economy.
He repeatedly analyzes the situation, offering little solution and leaves the problem emphasized on our doorstep. I do not think this was ever intended to be his function.
Rowe sent a copy of the letter to Diefenbaker, with a handwritten addition in the margins. “Better destroy this when read, but Don was 100% in agreement - I suggested to him verbally if he couldn’t stop Coyne talking & couldn’t fire him he better plan for a Royal Com. on Financial Institutions - during which he couldn’t talk.”87
Fleming put the idea of a royal commission informally to the cabinet almost immediately, and discussed its composition with the prime minister. In February he made a formal proposal, which met the usual “welter of opinions” in cabinet and was not approved until just before his budget speech in June 1961. The commission was not appointed until October 1961 - which meant that however desirable it might be on other grounds, it did not serve Rowe’s purpose of silencing James Coyne.88
The speeches continued, with the approval and sometimes the unanimous, retrospective consent of the bank’s board of directors.89 Coyne’s increasing emphasis on the dangers of a large payments deficit and a growing foreign debt gave his speeches a notably nationalist flavour. In Calgary in October 1960 he declared:
We are now at one more of the critical crossroads in our history, perhaps the most critical of all, when economic developments and preoccupation with economic doctrines of an earlier day are pushing us down the road that leads to loss of any effective power to be masters in our own household and ultimate absorption in and by another. The fact that the modern word for “absorption” is “integration” or even “economic integration” does not alter the essential nature of the result.
The country was spending more than it produced, while its own productive capacity was underemployed. Increased employment, he suggested, would only serve a national purpose if it were directed above all to the replacement of imports by home production. That could happen only slowly, through changes in the structure of the economy. “Easy credit, more debt and printing press money” were tempting but false means of escaping high unemployment. They were, on the contrary, expressions of the “soft-living, restricted working, borrow-from-the-other-fellow kind of philosophy which if allowed free rein will undermine our economic stability and progress and our national independence.”
Unemployment should not be met by “inflationary finance,” but by a cautious pay-as-you-go policy based on Canadian savings. Coyne offered few specifics, but hinted at an activist national policy of diversification, Canadianization, and improved education that might involve measures of investment and import control.90 These were stirring and controversial words that strayed across the line of neutrality into political debate. Fleming pleaded that he had no responsibility, under the Bank of Canada Act, for the governor’s words and policies.
By 1961 Fleming was alarmed at Coyne’s celebrity and at the governor’s ability to confuse the public and embarrass the government. He hesitated to ask Coyne to cease his speech-making, fearing that Coyne would take this request as interference with the bank’s independence. He knew that the cabinet opposed Coyne’s reappointment to a second term, but worried that such an announcement “would leave us with a hostile governor on our hands, and perhaps a bewildered and critical public, for nearly a year.” A request for Coyne’s resignation, he thought, “might precipitate a battle royal.” Only parliament could dismiss him. Fleming felt trapped.91
On February 20 some directors of the bank criticized the governor at a board meeting for engaging in public controversy. Coyne responded tartly that his own speeches were non-partisan and that controversy had arisen only because he had been attacked by members of the opposition; meanwhile the minister had neither supported nor disavowed his views. Coyne accepted no further public engagements after that meeting, but he did fulfil two previous commitments in the weeks that followed.92
After Coyne’s next address – to the Economic Club of New York in March 1961 – the Chicago Daily News called him “Canada’s most controversial figure … on the verge of achieving international status as a row-provoker.”93 Fleming told the House of Commons: “I take no responsibility whatever for the contents of that speech or for any views expressed in it. The governor of the bank did not consult me before he made it. He did not undertake to speak for the government, and anything contained in that speech is his responsibility.” Fleming’s tone had hardened. He was no longer defending Coyne’s “right as a citizen to make speeches,” as he had done in February. When Paul Martin asked what the government proposed to do “in respect to those matters in that speech which are not in accord with government policy,” the minister hinted at something more. “We shall continue to regard ourselves as servants responsible to parliament. We shall not seek to override the enactments of parliament. It will remain for parliament to decide in those circumstances what is the proper course to be taken.”94
Coyne had written to Fleming in February expressing worry over the scale of capital inflow from the United States and the balance of payments, and suggesting tax and spending increases and temporary tariff surcharges. Fleming requested a meeting, which occurred on March 18 after the last of the governor’s scheduled speeches. Remarkably, this was the first time that the two had discussed Coyne’s speeches, although there had been twelve of them, begun sixteen months earlier. The encounter involved an exchange of accusations. Coyne asserted that the public had come to expect too much of monetary policy because the government had failed to explain its economic policies. Fleming replied that the governor’s proposals would not solve the country’s problems, but worsen them. His speeches should be limited to explaining how the Bank of Canada operated.
I told him plainly that his public utterances had caused acute embarrassment to the government and to myself and had inevitably created the impression of a conflict of opinion between the government and the governor. I added that I personally had submitted to much criticism occasioned by his speeches, but had felt compelled to refrain from public comment on them. I told him very frankly that in recent weeks I had been asked whether he was attempting to undermine the government. I had been placed in the equivocal position of having to defend publicly the governor’s right to make his speeches while in fact deploring his actions and strongly disagreeing with his proposals. I said flatly that the appearance that he was openly challenging the government was impairing public confidence in the Bank as an institution, and I regarded this as very serious.95
Coyne denied that he sought to undermine the government; rather, he was trying to “save the country from economic ruin.” Fleming thought him “unblushingly unrepentant … too preoccupied with the question of the balance of payments and … very hostile toward the United States.” The meeting ended in a standoff.96
Because Coyne had told him that he was not “getting his ideas through,” Fleming invited him to meet with senior members of the finance department, the cabinet secretary, and several ministers. Here – after Fleming had repeated his claim of embarrassment and washed his hands of responsibility before the assembled company – Coyne reviewed his arguments in what Fleming called “a high-handed manner.” A rude and angry argument broke out between Coyne and assistant deputy minister Simon Reisman. After the meeting ended, the senior assistant deputy minister, Wynne Plumptre, told the minister: “He’s a very poor governor.” The veil of dutiful respect fell from Fleming’s eyes.97
On March 23, 1961, Fleming made a scrupulously detailed report on these meetings to cabinet
, “including a sentence-by-sentence account of my discussions with Coyne.” Fleming no longer defended him, and ministers now seriously considered how to dispose of this troublesome priest. While the minister of finance was “working on an economic program for the budget to cope with the deterioration in the national economy,” the governor “was preaching contrary and totally unacceptable fiscal policies.”98 Fleming did not concede that Coyne had actually stopped preaching by that time.
Fleming knew that a Senate committee, controlled by a Liberal majority, intended to call Coyne as a witness, but that would not occur until late in April. Should the government, in the meantime, refer his annual report to the House committee on banking and commerce? Fleming thought “that would create unnecessary controversy.” Cabinet opted for what it hoped would be a quiet solution. The minister of finance was directed to tell Coyne that his appointment would not be renewed in December; that he could take immediate retirement leave or full retirement; and that he would receive his full pension whenever he chose to go. But there was a caveat. Fleming had learned just before the meeting that the governor’s pension, payable from December 31, 1961, would be $25,000, or 50 percent of his salary – and that struck the frugal minister as “extraordinarily large.” Cabinet asked him to examine “the authority for so large a pension being paid after only seven years’ service as governor.”99