The Sometimes Rocky Relationship Between Central Banking and Politics

Canada | Money

7 hours ago

Originally posted by: The Epoch Times

Mark Carney’s recent appointment as prime minister marks the first time in Canadian history that a former governor of Canada’s central bank became head of the federal government. Traditionally, central bankers remain at arm’s length from government operations, but over the years there have been times when that didn’t hold true.

Carney himself broke that mould when he served as governor of the Bank of England. During the 2016 Brexit campaign, the pro-Brexit side and some politicians were unhappy that as the central banker he spoke publicly against the UK leaving the European Union.

There have been other cases where central bank governors ended up causing friction with elected politicians.

Back in the early 1960s, there was a very public dispute between Ottawa and the head of the central bank. Dubbed the Coyne Affair, it resulted in the resignation of the second governor of the Bank of Canada.

Bank of Canada’s Beginnings

Twenty years after the U.S. Congress established the Federal Reserve in 1913, momentum for a central bank began in Canada.

The pressures of the Great Depression prompted criticism of the Canadian banking system, which then consisted of a small number of banks with branches in multiple communities serving the mainly rural population. At the time, Conservative Prime Minister R.B. Bennett was also concerned that Canada lacked a direct means for settling international accounts.

In 1933, Bennett established a Royal Commission to consider whether Canada should have its own national banking authority. The five-member inquiry was chaired by Lord Macmillan, a judge from the United Kingdom.

By a three-to-two vote, inquiry members recommended that Canada form a central bank. Its main roles would be to “regulate credit and currency in the best interests of the economic life of the nation,” cooperate with similar bodies in other countries to “mitigate by its influence fluctuations in the general level of economic activity,” and “be a ready source of skilled and impartial financial advice at the disposal of the administration of the day.”

The Bennett government passed the Bank of Canada Act in 1934, and the bank began operation in March 1935 as a privately owned institution—to ensure political independence—with shares sold to the public.

However, the Liberal government of William Lyon Mackenzie King, who became prime minister in October 1935, bought the Bank of Canada in 1938 and amended the act to nationalize the institution. The bank became publicly owned in 1938 and has remained a Crown corporation since.

Despite this move, the bank was still expected to operate independently of the government.

The Coyne Affair

Bank of Canada governor James E. Coyne (C) holds a press conference in Ottawa on June 13, 1961, in connection with his statement that he had been asked to resign but had refused. He stepped down a month later. (CP Photo) — Bank of Canada governor James E. Coyne (C) holds a press conference in Ottawa on June 13, 1961, in connection with his statement that he had been asked to resign but had refused. He stepped down a month later. CP Photo

Graham Towers, earlier with the Royal Bank of Canada, was the central bank’s governor for its first 20 years. Towers was succeeded by Oxford University Rhodes Scholar James Coyne in 1955. Coyne had served as deputy governor for five years before being appointed governor by Liberal Prime Minister Louis St-Laurent.

Walter Harris, then finance minister, established the “Harris doctrine,” namely that the central bank sets monetary policy completely independently from the will of the government, while the government was responsible for fiscal policy and debt management.

Coyne implemented tight monetary policies that hindered the availability of commercial credit. The John Diefenbaker Progressive Conservatives, who took power in 1957, grew opposed to Coyne’s policies, as did the Liberals and many leading economists.

However, in a series of speeches and media events across the country that began in 1959, Coyne blamed Canada’s economic struggles on Diefenbaker’s fiscal policy and called for tightened spending and more protectionism. These statements scared off foreign investment.

With Coyne’s seven-year term as governor set to expire at the end of 1961, the bank’s directors decided not to renew his term but also voted to increase his annual pension from $12,000 to $25,000. His salary at the time was $50,000, much higher than that of the prime minister. The Diefenbaker cabinet wanted Coyne gone immediately, both because of his policies and public posturing, and the pension increase, but lacked the authority to fire him.

In apparent defiance of his oaths of secrecy, Coyne revealed letters between him and Finance Minister Donald Fleming in order to defend himself. Coyne said he would not resign “merely because the government of the day asks him to,” given he saw no “valid case” to do so. Fleming in turn said “Coyne had declared war on the government.”

Fleming eventually tabled a bill to fire Coyne, by declaring the position of Bank of Canada vacant. The bill passed the House of Commons but was subsequently defeated by the Liberal-dominated banking and finance committee, partly because Coyne finally agreed to resign. He did so on July 13, 1961.

Louis Rasminsky succeeded Coyne as governor and had good relations with the government. However, the political damage of the Coyne affair hampered the Diefenbaker Progressive Conservatives in the 1962 election, lowering their seat count from 208 to 116. They lost power entirely in 1963 to Lester B. Pearson’s Liberals.

In 1967, Pearson’s government amended the Bank of Canada Act to clarify the spheres of responsibility governing cooperation between the bank and the government.

Mark Carney

With economics degrees from Harvard and Oxford, Carney had a 13-year banking career around the world with Goldman Sachs, then served as the Bank of Canada’s deputy governor for a year followed by over three years as Canada’s senior associate deputy minister of finance. He was appointed to a seven-year-term as governor of the Bank of Canada on Feb. 1, 2008.

Indications are that Carney had a good working relationship with Stephen Harper’s Conservative government of the day, though the significance of Carney’s role in guiding Canada through the 2008–09 Great Recession is now a matter of partisan dispute.

Carney left the Bank of Canada in June 2013 to join the Bank of England as governor on July 1 that year, the first non-Brit to hold this post.

Carney was accused by some of venturing into political debates during two referendums. He said Scotland would not be able to keep the British pound as its official currency if it voted for independence, partly because all three major political parties in London were against sharing the pound. “In that context, a currency union is incompatible with sovereignty,” he said. The Scots rejected breaking away from the UK with a 55 percent vote in 2014.

In March 2016, Carney warned that if Britain voted to leave the EU, the result “could possibly include a technical recession,” though the central bank had not made any formal forecasts to back the claim. UK Conservative Prime Minister David Cameron said Carney had sent “a very clear message” on the dangers of Brexit.

Chancellor George Osborne, the UK’s chief financial minister, agreed the UK now had a “clear and unequivocal warning” about Brexit. ”The Bank is saying that it would face a trade-off between stabilising inflation on one hand and stabilising output and employment on the other,” he said, the BBC reported.

However, Brexit backers like Lord Lamont, spokesperson of the Vote Leave campaign and a former Conservative chancellor, cried foul.

“The governor should be careful that he doesn’t cause a crisis. If his unwise words become self-fulfilling, the responsibility will be the governor’s and the governor’s alone. A prudent governor would simply have said that ‘we are prepared for all eventualities’,” Lamont said.

In response, a spokesman for Carney told the BBC: “Assessing and reporting major risks does not mean becoming involved in politics; rather it would be political to suppress important judgments which relate directly to the Bank’s remits and which influence our policy actions.”

However, Conservative MP Jacob Rees-Mogg, who sat on the Treasury Select Committee, called for Carney’s resignation. “I think it is unprecedented for the governor of a central bank to suggest that people should short his own currency,” he said. “Suggesting sterling will fall sharply is simply not what responsible central bankers do.”

In 2018, Rees-Mogg renewed his calls for Carney’s departure.

“I think he’s politicized the Bank of England,” Rees-Mogg told the BBC.

In 2016, 51.9 percent of Brits voted to leave the European Union, but implementation was slow. In August 2019, Carney warned that if the UK left the EU without a deal, gas and food would become more expensive, and the value of the pound would fall, causing a “real economic shock.”

In response, former Tory Leader Iain Duncan Smith accused Carney of reviving “project fear” against Brexit.

Prime Minister Boris Johnson reached a deal with the EU for Britain’s departure late in 2019. Britain finally left the union on Jan. 31, 2020. Carney resigned six weeks later, on March 15, 2020.

Trump vs. Fed

Federal Reserve Chairman Jerome Powell after testifying before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on Feb. 11, 2025. (Madalina Vasiliu/The Epoch Times) — Federal Reserve Chairman Jerome Powell after testifying before the Senate Committee on Banking, Housing, and Urban Affairs on Capitol Hill on Feb. 11, 2025. Madalina Vasiliu/The Epoch Times

In his first term and so far in his second term, U.S. President Donald Trump has been a fierce critic of Federal Reserve Chairman Jerome Powell.

After a modest cut in interest rates in September 2019, Trump said on social media that “Jay Powell and the Federal Reserve Fail Again,” adding, “No ‘guts,’ no sense, no vision!”

On Oct. 30, 2019, the Fed announced its third interest rate cut of the year, but Trump wasn’t satisfied that it was only a quarter of a percentage point.

In his 2024 campaign, Trump called for lower interest rates to bring relief to borrowers. However, in January this year, the Fed maintained its target rate of 4.25 percent to 4.5 percent.

Powell said he’d had “no contact” with Trump, who said in a social media post that Powell and the Fed had “failed to stop the problem they created with Inflation.”

Poilievre vs. Macklem

Conservative Party Leader Pierre Poilievre has been critical of current Bank of Canada governor Tiff Macklem, accusing the bank of “printing money” to support the Liberal government’s deficit spending during the pandemic, causing inflation.

“I would replace him with a new governor who would reinstate our low-inflation mandate, protect the purchasing power of our dollar, and honour the working people who earned those dollars,” Poilievre said in 2022 as he was seeking the Conservative leadership.

Macklem defended the bank’s actions during the pandemic, saying it needed to pursue a policy of quantitative easing because the markets were “frozen.”

He added that he welcomes criticism, but that he will “leave politics to the politicians.”