The following excerpt is from Freedom Fighter: John Diefenbaker’s Battle for Canadian Liberties and Independence by Bob Plamondon, published by the Aristotle Foundation for Public Policy. Foreword by Jean Chrétien.
John Diefenbaker was a man of modest means with an aversion to debt. As a child, he witnessed the consequences of his family’s increasing indebtedness, which became a severe burden and worry. To economize, his family ate largely out of their garden. Because the water from their well had high alkalinity, a family member had to trek to a neighbouring farm twice a week to gather and then haul away a barrel of water on a stoneboat. When he rode a horse, it was bareback, as there was no money for a saddle. In the winter, he would wake up to a wash basin with water that turned to ice in the night.
Growing up poor taught Diefenbaker never to waste money. Having experienced poverty, he saw his responsibility as prime minister to “bring about a higher standard of welfare for all Canadians, and in particular for those who because of age, disability, unemployment or other causes would not normally enjoy a reasonable share of the good life.” His twin experiences of both debt and poverty meant Diefenbaker never saw his desire or his policies designed to help the poor as the opposite of fiscal prudence. He thought both were necessary and both possible.
Like most western politicians of his era, Diefenbaker thought it appropriate for the government to run deficits to stabilize the economy during a recession and help those suffering from an economic downturn. During Diefenbaker’s time in office, his government faced two economic recessions, one in 1957 to 1958 that he inherited from the Liberals and another in 1960 to 1961 that followed the American experience but was exacerbated by flawed monetary policies of the Bank of Canada.
Diefenbaker had no inkling that the economy was in recession when campaigning in the June 10, 1957, election. Upon becoming prime minister, he rebuked the Opposition Liberals for deliberately withholding that fact from the Canadian people and for timing the election to avoid accountability for the tough times ahead. Following Diefenbaker’s surprise election victory, his finance minister, Donald Fleming, delivered the first economic statement by a Conservative in the House of Commons in over 20 years on Dec. 6, 1957.
Following up on the election promises, Fleming announced that the low tax rate for small business corporations would apply to the first $25,000 in profits, an increase from the existing limit of $20,000. The excise tax on automobiles was reduced from 10 to 7.5 per cent. The personal income tax deduction for dependents was increased by $100. Tax rates were substantially decreased for low- to modest-income individuals, benefitting 70 per cent of Canadian families.
The government’s economic statement was modestly stimulative in that it left more money in the hands of Canadians to spend to counter the adverse consequences of a recession. In essence, this was a “supply-side” approach to combatting a weak economy and unemployment: make it easier for businesses to thrive and hire, and for consumers to spend — the “rising tide lifts all boats” strategy. This approach was to be popularized decades later by University of Chicago economist Milton Friedman and put into policy under Ronald Reagan in the United States after his 1981 ascension to the presidency.
In his April 1959 budget, Fleming had better news to share with Canadians. The recession was over, and the economy was growing. Fleming claimed the government’s stimulus did its job. Concern over inflation was noted, with consumer prices rising modestly but sufficient to gain the government’s attention. However, inflation during Diefenbaker’s time in office did not vary materially from the level experienced in the United States and remained near or below two per cent. The Canadian rate was lower than almost every other developed nation.
From the very early days in office, the Diefenbaker government was at odds with the governor of the Bank of Canada. James Coyne became governor on Jan. 1, 1955, an appointment of the Liberal government headed by Louis St. Laurent. Coyne was a lawyer and not an economist. He most recently served as the deputy governor under his predecessor, Graham Towers. A more qualified candidate, Louis Rasminsky, a trained economist with a strong international reputation, was passed over by the St. Laurent government because of his religion. Rasminsky was Jewish.
Coyne was an ardent nationalist who ultimately engaged in political commentary critical of Diefenbaker’s fiscal policies. This placed him well outside of the mandate of the Bank of Canada and the role expected of its governor.
When Coyne was appointed governor, it was not a particularly demanding job. The bank’s overnight lending rate had held steady without change between 1950 and 1954 at two per cent before briefly falling to 1.5 per cent in 1955. With Coyne at the helm, the bank rate was set on a rollercoaster ride. Under Coyne, the Bank of Canada raised the rate from just above one per cent in 1958 to 6.4 per cent within one year, then reduced it to two per cent before sending it upward again to near six per cent in 1962. In these years, Canadian interest rates were erratic, making business planning and investment decisions difficult. On the positive side, in the early days of the Diefenbaker government, Coyne successfully navigated the restructuring of Canada’s national debt holdings.
When the Bank of Canada began to tighten monetary policy, there were voices in cabinet who thought it was going overboard. The minister of finance was officially tasked in cabinet minutes to speak with Coyne and “to impress upon him the necessity of taking measures to relax the present tight monetary policy and to remove credit restrictions.” Coyne denied that he was pursuing a “tight monetary policy,” and in his 1957 annual report, inappropriately released during the 1958 election period when such reports are to be withheld to avoid political controversy, posited that he was following a “sound monetary policy.”
Some background here helps explain both the Diefenbaker government’s frustration and that of Coyne. By design, the governor of the Bank of Canada operates with some independence from the government of the day but is expected to stay in the monetary policy “lane.”
Instead, Coyne began speaking publicly about what he thought was the government’s economic mismanagement in 1959. In a January 1960 speech in Winnipeg, Coyne argued that Canada’s economic woes were due to overspending and high borrowing levels by the Diefenbaker government. A nationalist at heart, Coyne also said that Canada was at risk of losing its economic independence and should cease immediately to borrow on foreign markets “as would any country that had reached a level of economic maturity.”
Coyne’s commentary on the government’s fiscal policies was demonstrably outside the legitimate purview of the Bank of Canada. He had repudiated Diefenbaker’s nation-building investments in natural resource and infrastructure projects as it was implementing policies on which they held a mandate from Canadian voters. Coyne doubled down in a speech in Hamilton not long after his Winnipeg incursion, claiming that Canada’s future as a sovereign nation should not be taken for granted: “Rapidly growing foreign debt must ultimately lead to the loss of any capacity to be masters in our own house. If we do not effectively change the trends of the past, we shall drift into an irreversible form of integration with a much larger and more powerful neighbour.”
Diefenbaker and his finance minister took Coyne to task for his impertinent remarks. In December 1960, in his supplementary budget, Finance Minister Fleming remarked, “The result of blocking our foreign investors would be to produce a little Canada.” Fleming felt compelled to visit New York City to reassure investors that the country remained open for business despite the Bank of Canada’s warnings.
Officials at the Department of Finance, who typically offer restrained language in written communication, were uncharacteristically blunt. In a memo to Deputy Minister of Finance Kenneth Taylor, his senior officials within the Finance Department took a run at the bank’s governor: “Mr. Coyne appears to be not only an ardent nationalist but also an interventionist and protectionist.”
Coyne understood both the Department of Finance and the Diefenbaker cabinet believed that his speeches were inappropriate, his conclusions were erroneous, and that he had ventured well outside the bank’s mandate. For its part, the press enjoyed the copy generated by the feud and, if anything, was sympathetic to the governor’s nationalist urgings. The Coyne-Diefenbaker dispute was no mere quibble over the intricacies of economic policy. That was important, but just as critical, the public falling out was an argument about the proper role of the Bank of Canada and its governor’s public musings.
Excerpt from Freedom Fighter: John Diefenbaker’s Battle for Canadian Liberties and Independence, by Bob Plamondon, published by the Aristotle Foundation for Public Policy. Reproduced with permission.