CHAPTER 4

The Economic Muddle: Coyne, the Recession, and the Declining Dollar

The Diefenbaker government’s problems in dealing with Britain’s attempt to join the Common Market were minor in comparison to the crisis in the domestic economy. The great post-war boom had sputtered to a halt in 1957, and the unemployment rolls began to grow. There was concern in business circles about large budget deficits, and nationalists had begun to worry aloud about the extent to which the economy had fallen into the hands of foreign investors. Donald Fleming, the Minister of Finance, struggled manfully to deal with these difficulties, but he and his ministerial colleagues were badly divided on policy, and there were serious differences within the bureaucracy, most notably between the Governor of the Bank of Canada, James Coyne, and officials in the Department of Finance. All the makings of a crisis were there.

I

The Bank of Canada’s Annual Report is usually greeted with general indifference. The prose is dry, the statistics cold, the message invariably spartan in its call for Canada to tighten its belt and reduce expectations. But in March 1958, when the report for 1957 was made public, an election campaign was under way, and the governor’s message sparked the interest of the press.

“During the recent period when the abnormally high demand for money far outran the moderate increase in the rate of savings and the moderate increase in the money supply,” Coyne wrote shortly after the Diefenbaker government took office and the economy began to slide into recession, “the impression seems to have arisen that the money supply was actually being contracted. This was not the case. The supply of money increased and its velocity of circulation rose very substantially. The phrase ‘tight money policy’ may sometimes be used to refer to matters other than monetary matters…. To the extent that the phrase might be taken to imply a contraction in the availability of money it is not applicable. In this sense of the phrase,” the Governor of the Bank of Canada insisted, “there has never been a ‘tight money policy’ in Canada since the establishment of the central bank twenty-three years ago. There has been what I would call a sound money policy, and I trust there always will be.”¹

What made Coyne’s report news was that the Progressive Conservatives, in power for nine months and seeking the transformation of their minority status into a majority one, were denouncing the tight money policies that had been practised, they claimed, by the previous Liberal regime. In fact, the prime rate charged by the chartered banks to their best customers was 5.25 per cent in mid-February 1958, down a half point from the peak of August 1957 and equal to the level of mid-August 1956.² Both those rates, however, were too high for the Diefenbaker Cabinet, worried as it was by the economy’s slowdown and the rise in unemployment. In November 1957, in fact, the Cabinet had instructed the Minister of Finance to talk with Coyne and to “impress on him the necessity of taking measures to relax the present tight money policy and to remove credit restrictions.”³ The government was feeling the pinch, and its supporters were complaining that high interest rates were still in place. Donald Fleming, for one, had written privately to the editor of the Winnipeg Tribune in February 1958 that tight money “has very materially relaxed since we came into office. While government action is not entirely responsible for the easing…never the less these trends have been in keeping with Government policy, and we have played our part in bringing them about.”⁴

Now Coyne was denying that tight money had ever existed, and the government was furious. One minister said that the governor had demonstrated his unfitness for office; another called the report a belated attempt to “help the Liberal Party”; and a third said, “I don’t know what the move will be, but one thing is sure – the Bank of Canada will be made more responsible to Parliament.”⁵ Fleming argued that Coyne was putting his own definition on the meaning of tight money and, he said, the people who had to pay the high interest rates did not need to be told anything about it: “…they know the effects of it all too well from personal experience.” Did he intend to fire the governor? the press in Vancouver asked Fleming. “No.” Would the differences in opinion require the governor’s resignation? “I have no reason to think so.”⁶ The political issue blew over after the election, although unquestionably it left strong memories.⁷

The governor, James Coyne, was forty-seven years old when he first became a subject of controversy. A brilliant, quiet man with strong emotions, Coyne had been born in Winnipeg in 1910. His father, J.B. Coyne, was a strong Liberal with the best of connections in the Gateway City, a commitment to nationalism and internationalism, and a close friendship with J.W. Dafoe, the great editor of the Free Press. His son inherited his father’s nationalism, and a Rhodes Scholarship did nothing to dilute it, nor did the practice of law in Winnipeg. But the younger Coyne was not to be a practising lawyer for long. In 1938, he joined the Bank of Canada. The bank, opened in March 1935, gave the federal government the power to control foreign exchange and issue currency, and the existence of a central bank, if it was used to the fullest, let the government influence, if not direct, the course of the economy. Coyne’s initial position was in the bank’s research department (the first applied research unit in the federal bureaucracy), and there he worked on the Rowell-Sirois Royal Commission, on the planning for the Central Mortgage and Housing Corporation, and, with the onset of war, on the Foreign Exchange Control Board. Then he served on the Wartime Prices and Trade Board, did a brief stint in the Royal Canadian Air Force, and in 1944 returned to the bank. When the first governor, Graham Towers, stepped down in 1954, Coyne was both the retiring governor’s and the board of directors’ choice for the post.

Although Coyne had little formal training in the dismal science, his capacious mind and his great capacity for work had led him to read the classics of economics as well as the works of modern economists. He had become sceptical of J.M. Keynes’s belief that an economy in depression could be set right by government spending and deliberate deficit financing, and by the time of the 1958 election he had come to the unshakeable conviction that the real enemy was inflation. By later standards, the rate of increase in the consumer price index was low –from January to October 1957 the increase was 2.5 per cent⁸ – but Coyne nevertheless was afraid of its corrosive effects, fearful of the tendency of governments to spend in ways that fed the fires. Part of this was simply the mystique of the central banker, the feeling, apparently shared by all governors, that only the bank stood between wasteful politicians pandering to the electorate and the long-term health of the nation. But part was also a shrewd understanding of the system and a knowledge of the dangers inflation posed to the polity. This was why Coyne, later calling himself “a premature anti-Keynesian revisionist,” tried to keep the money supply under tight control.⁹

More to the point, Coyne could do this because the Bank of Canada Act gave the governor almost untrammelled authority. The bank was wholly owned by the government, but the governor was appointed for a fixed term and thus could be removed only if his behaviour was scandalously inappropriate or if Parliament passed legislation declaring the office vacant. This was deliberate. Monetary policy was seen as a particularly sensitive and critical area and one too subject to the whims of politicians and the winds of opinion to be left to anyone other than a well-paid, well-protected official to implement. The governor had to be independent, even though the government had the ultimate responsibility for his policies and any governor had to realize that he could go only so far with policies the Minister of Finance could not accept. To exceed these limits could destroy the bank and ruin a governor’s career; a major clash could also have a serious impact on the economy for it had to suggest that no one was minding the store. Coyne knew all this; so too did Fleming.

Donald Fleming had been the Member of Parliament for Toronto-Eglinton since 1945. Hard working, earnest, careful and precise, as his massive memoirs demonstrate, Fleming had run for the leadership of his party in 1956 only to lose badly to John Diefenbaker. It was not in his character to rail against fate, however, and at fifty-one years of age Fleming set out to be a loyal follower of the Chief. And when the Tories won the 1957 election, Fleming got the nod for Finance.¹⁰

But there was one potential problem. Before the 1957 election, Fleming had assailed Walter Harris, the St. Laurent government’s Minister of Finance, over interest rates. Would the government order the Bank of Canada to lower the rates? Harris’s reply in June 1956 was taken by the Opposition as an evasion of governmental responsibility: according to statute, “the Bank of Canada takes the responsibility for its actions.” Two months later Harris had explained away another interest rate increase by saying that “this action is the action of the governor of the bank and his responsibility alone.” Fleming denounced this argument, declaring that the government “cannot shed its responsibility for full fiscal policy in the broadest sense of the word and that must include the actions of the Bank of Canada, even when, in a technical sense, those actions are taken by the Governor….”

But once he had become Minister of Finance himself, the temptation to put the blame on the bank was strong. In April 1959, for example, as interest rates began to rise, Fleming did just that. “In the matter of monetary policy,” he told the House, “this Parliament has placed the responsibility…and the power in the hands of the Bank of Canada. The government does not exercise any sway in the field of monetary policy.” The minister had altered the equation significantly, saying that the responsibility and power were the bank’s.¹¹ In the circumstances, James Coyne might have been forgiven for believing what his ministers said.

—

The Diefenbaker government had the bad luck to assume office just as the post-war Canadian economy began its first serious economic slowdown. The boom that had rolled on uninterruptedly was coming to a close, and Canadian productivity, growth, inflation, and unemployment rates were entering a period of uncertainty. The cycles of boom and bust were getting shorter in duration, and somehow the old economic verities and the tried and true economic remedies no longer seemed to work as well as they once had.¹²

The problems were immediately apparent to the new government. In the fall of 1957, for example, one government economist predicted that unemployment four months ahead would be at a post-war high, a result of the declining demand for the products of the resource industries, a lower level of business capital investment, a reduced consumer demand, and a decline in the housing market. The only possible benefit in all this was that the pause in expansion might halt creeping inflation.¹³ This was of great importance to the government, of course, for with its minority situation in Parliament another election had to come quickly, and a weak economy would be detrimental. While a few employment-creating projects were put into effect, as R.B. Bryce wrote, the chief measure to be directed against unemployment was fiscal policy. A cash deficit of almost $1 billion was expected, compared with a modest surplus the year before, he said in February 1958. “This will be the main manner in which government policy influences employment and will be very substantial in sustaining the level of employment and income.”¹⁴

Fleming and the government had some luck when the economy began to improve in March 1958, the month of the federal election. Unemployment dropped quickly, falling from 366,000 in May to 286,000 in July, while wages, retail sales, output, and exports all rose. And as a paper prepared in the bureaucracy noted, government expenditures were helping the economic upturn.¹⁵ Fleming’s budget in June had predicted a $1.4-billion cash deficit and was expansionist in tone.

The improved conditions seem to have given the government the confidence in the summer of 1958 to undertake a massive conversion of wartime Victory Bonds, due to mature between January 1, 1959, and September 1, 1966, and paying an average of 3 per cent, into longer-term bonds paying an average of 3.83 per cent. Organized by the Bank of Canada, the conversion loan featured patriotic hoopla; it also produced large windfall profits for brokers and advertising agencies. But the conversion was a success, as more than 90 per cent of the outstanding Victory Bonds were turned in, almost two thirds going into fourteen- and twenty-five-year maturities. The reason behind it all was, as Assistant Deputy Minister of Finance A.F.W. Plumptre later explained, that the “issuance of new government bonds could be expected to run into continual difficulties” with the heavy maturity of the Victory issues “overhanging the market.” And new government issues were going to be necessary to finance the record budget deficits that Fleming was incurring.¹⁶

At the bank, James Coyne pumped money into the economy to support the new bonds’ prices. As Coyne wrote in the 1958 Annual Report, the bank “stood prepared to make markets in all maturities of Government securities” during the conversion campaign “even if this should involve a substantial degree of monetary expansion.”¹⁷ It did, and it involved even more when the American bond market coincidentally weakened. Inevitably the result was that many bond purchasers saw their investments fall in value when the bank began to tighten up the money supply once more. Fleming told his Cabinet colleagues, “It is the play of forces in the market which determines the day to day price of bonds. It happens that, largely as a result of the continued erosion of the United States bond market, there have been weakening effects on market offerings for Government issues in Canada. There is no way of insulating the Canadian bond market from such influences….”¹⁸ That was probably true, but large numbers of investors were furious. And the angry complaints probably made Fleming look askance at the governor.¹⁹

One effect of the conversion loan may have been to drive interest rates up.²⁰ The prospect – and the reality – of government budget deficits aided this process as well. In November 1958, while the echoes of the conversion loan were reverberating, K.W. Taylor, the Deputy Minister of Finance, sent Fleming his tentative appraisals of the budgetary outlook for 1959-60. For someone as concerned with sound money and balanced budgets as was the minister, the memorandum could not have been pleasant reading. Revenues for 1958-59 were projected at $4,680 million and for 1959-60 at $4,975 million, while expenditures were estimated at $5,380 million and $5,875 million in those two years. The expenditure estimates were probably low, both being predicated on squeezing defence costs and keeping civil programmes under control. The deficits for 1958-59 and 1959-60 were expected to be $700 million and $900 million. “I am sure you will agree,” Taylor said, “that these figures give grounds for very serious concern…. You will want to give a good deal of thought to your strategy and tactics in putting these problems squarely before your colleagues.”²¹

That was the problem. Although no minister worked harder in his office, in Parliament, and in the country (and told everyone so), Fleming never quite managed to establish his authority with the Prime Minister or the Cabinet. Many ministers, Alvin Hamilton being one example, tended to think that they knew as much about finance, budgets, and the economy as the Minister of Finance and his officials, and Fleming had to wage constant war with his colleagues. The business community, however, frightened at the disorganization of the Diefenbaker regime, looked to Fleming as its bulwark. But given the Western populist cast of the Diefenbaker government, that was not an unalloyed benefit for Fleming.

J.M. Macdonnell, the Minister without Portfolio, was a good guide to business opinion. In March 1959 he told Fleming that the measures in the budget to deal with the deficit were the key. If business deemed the steps adequate, interest rates could be expected to drop; if the measures were weak, the rates would certainly climb – and then even high interest rates might have no effect in restoring confidence.²² Fleming was getting similar advice from his department, and the Prime Minister was hearing the same tune from the Secretary to the Cabinet. In a memorandum on March 20, 1959, just before the first Cabinet discussion on budget policy, R.B. Bryce argued that Canada was living with the paradoxical situation of unemployment and inflation in coexistence. “The reason behind this situation lies, I think, as much in the nature of our society as in anything of a strictly economic character. We have now powerful organized groups in the community, contending with one another and using all the arts of organization, industrial power, propaganda and pressures on government to gain their ends. So far, the only way of reconciling the conflicting interests of these groups…is in permitting some gradual upward movement in costs and prices.” To Bryce, it was necessary “to accept some cost in terms of unemployment in order to check inflation or vice versa.” His budget advice was “that you should increase taxes fairly substantially in this coming year…something in the neighbourhood of $300 million….” That would still leave a large deficit but would stimulate the economy, which could be expected to continue to improve. From a different point of view, a tax increase would decrease the government’s reliance on a weak bond market and demonstrate that it had the “fiscal and economic situation under control.”²³

Fleming’s budget moved in the direction suggested. And very soon afterwards interest rates began to skyrocket. R.A. Bell, the M.P. for Carleton, Ontario, and Fleming’s former parliamentary assistant, wrote on August 15 to say that “the rise of 6.4% of the B. of Can. rate I find deeply disturbing. A rate .41 higher than the maximum chartered bank rate is incongruous. I’m no economist…but it does seem to me that there is a real chance that we are building up to a ‘bust’ – which will wreck the economy – and carry the Government to a Bennett-like grave.” Why, Bell asked, “must the Bank of Canada be so restrictive?…Could it be that Coyne is making a bogey of inflation?”²⁴ Others were thinking that too, although the speculative interest rate spiral was broken neatly on August 20 by a shrewdly timed ministerial intervention that, Fleming wrote proudly, produced the sharpest ever drop in the Treasury Bill rate.²⁵ For the time being, Fleming was defending the Bank of Canada’s policies and even using them as a weapon against his free-spending critics in the Cabinet. But in a volatile economic situation, allies could change.²⁶

One dubious ally was the Prime Minister. According to Ken Taylor, Diefenbaker could be fully persuaded of the need for restraint until he was “buttonholed by one of the Cabinet and becomes carried away with emotional excitement, for this cause or the other cause and new commitments are made.” Taylor had become convinced, he told a reporter in confidence, that the Prime Minister’s interest in monetary policy had one single motive: “He wishes to put the blame for tight money or any unpopular phase of monetary policy, entirely on the Bank of Canada. But in doing so,” Taylor continued, he “must meet one unanswerable criticism. Parliament created the Bank of Canada; parliament can change the statute at will. You have 208 members in a House of 265 members. If your government really thinks that the Bank of Canada is doing the wrong thing, why don’t you change the act or the personnel…?”²⁷ That was Diefenbaker’s dilemma, but so long as James Coyne had the support of Donald Fleming, it was unlikely that Diefenbaker could move.

But some of Fleming’s colleagues were extremely unhappy with the Minister of Finance, his budgets, and his Bank of Canada. The leaders of the opposition in Cabinet were Alvin Hamilton, David Walker, and Gordon Churchill, all men considered close to the Prime Minister. As Hamilton, the Minister of Northern Affairs and National Resources, said later, he had discovered while serving on the Treasury Board that the government’s expansionist direction was being reversed by the officials’ desire to keep costs down. That infuriated him, and after Fleming’s 1959 budget had sprung higher taxes on the country – and on the Cabinet too, Hamilton said – the angry ministers asked who was running the country, the Cabinet or the Department of Finance, the Bank of Canada, and officials afraid of inflation? As a result, Diefenbaker agreed to set up an unofficial ministerial committee – without Fleming – to look at financial policy. The committee met in the summer and fall of 1959, and the members heard many of the senior financial bureaucrats. Most, Hamilton recalled, agreed to follow the Cabinet’s desired priorities, but whether Coyne met with the ministers or not, he could not be persuaded to another view and could not accept the idea that government should spend to stimulate growth. The ministers were as nationalist as Coyne, Hamilton argued, but they were not “ghetto nationalists” who believed that Canada could live behind tariff walls.²⁸

There were no immediate policy results from the Cabinet revolt (Fleming produced a stand-pat budget in March 1960), nor was there much change after a series of similar meetings in late summer 1960, but in the long run an influential group of ministers came to recognize that Coyne was no friend. When Fleming finally abandoned the governor, he would be alone, and as the economy began to slide into recession in mid-1960 the relations between the governor and the minister, already delicate, became exacerbated further by Coyne’s frequent and contentious public statements.

—

In the autumn of 1959, the Governor of the Bank of Canada began to make an extraordinary series of speeches that were, James Coyne said later, “of rather greater importance than the kind of routine speeches that central bankers do from time to time make.”²⁹ So they were, and Coyne began his efforts to shape public opinion at the urging of the bank’s directors, who wanted the central bank’s position to be clear in the public mind and who wanted everyone to realize that the board, the Minister of Finance and, indeed, the government as a whole were in favour of the kind of monetary policy the bank was following. As Coyne said, his own reasons for the speeches were to foster public understanding of monetary questions, to point out how monetary policy was affected by other fields of economic policy, to point to the growing dangers to the economy from the large balance of payments deficit and the domination of economic activity by foreign corporations, and to show as forcefully as possible that unemployment could not be overcome simply by the use of monetary policy. Later Coyne was to argue that the fight against inflation was his primary concern and that he had raised these other issues to make clear that nonmonetary policies were more important than monetary policy in stimulating growth and controlling the rise in the cost of living.³⁰

Certainly Coyne’s first major speech dealt with inflation. In his address to the Montreal Canadian Club on November 16, 1959, the governor said that “inflation is particularly insidious in that it seems to some to encourage production and employment and expansion for a time, but it continually accumulates excesses, distortions, inefficiencies and injustices which in due course produce recession, loss of confidence and contraction.” Policy had to be directed at both price stability and growth: “We cannot achieve substantial and steady employment and growth without price stability and public confidence that price stability will be maintained.”³¹

A few months later Coyne told the Canadian Club in Winnipeg that Canadians had to live within their means and not pursue unrealistic rates of growth, particularly when they were based “to an excessive degree on borrowed money, whether domestic or foreign.” In Canada, the governor argued, “pursuit of an excessive and unsustainable rate of capital expenditure…has not only contributed to the unstable cycle of short-lived boom followed by recession but has also been responsible for a growing deficit in our international balance of payments, a large excess of imports…over our exports, increasing reliance on foreign resources to finance (directly and indirectly) both capital projects and consumption, and a great increase in our foreign debt….” Coyne quoted Fleming in his support: “…we must all avoid doing those things which are likely to encourage a forced and excessive growth in spending.”³²

That was Coyne’s view too, and he was more than willing to keep down the growth in the monetary supply as a contribution to that end. Presumably he had Fleming’s tacit support, for as the minister told a British Columbia party stalwart who had written to complain about tight money, the term should be avoided. The government had nothing to gain in a dialectic or semantic sense from permitting its fiscal policy to be described as “a tight money policy…. As you know, we have sought to avoid being tagged with that name.”³³ That was hardly rejection of the policy.

Coyne’s most important and controversial address was made on October 5, 1960, to the Canadian Chamber of Commerce in Calgary. Here he dealt particularly with foreign investment, arguing that Canada was at a crossroads “when economic developments and preoccupations 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.” That was strong stuff. So was Coyne’s assault on “the unimpeded inflow of foreign capital on the part of foreign companies and investors who thought they saw golden opportunities to undertake various projects in Canada or to buy up existing Canadian companies. Massive imports of capital put the Canadian dollar at a premium and induced massive imports of goods and services. The entire economy was put under strain….” What was to be done? “We should, for our own sake, live within our means and increase our means by our own efforts…a country which has reached Canada’s stage of development can make better progress, and retain more control over its own destiny, by relying on its own savings to provide the necessary capital.”³⁴

The Calgary speech made an impact. Alvin Hamilton’s chief political aide sent a note saying “It is most important you read this…. I cannot recall a speech made like this by anyone except P.M. in our history.”³⁵ Walter Gordon, actively engaged in rebuilding the Liberal party, told L.B. Pearson that Coyne’s was the bluntest, most devastating, and most outspoken criticism of government policies that had ever been made by a senior civil servant in Canada.³⁶ And A.F.W. Plumptre, no admirer of the governor, told Ken Taylor in a nine-page memorandum that Coyne was wrong about foreign investment. Plumptre maintained that there were two possible ways of dealing with it: an interventionist approach with legislation detailing things to be done and imposing controls or a market-and-institutional approach involving the development of Canadian markets and financial institutions in ways designed to alleviate the difficulties of foreign ownership. “One might expect a central banker to dwell on the latter possibilities; the fact that he does not do so seems to imply a lack of interest in them.” More particularly, Plumptre said that foreign capital could not be turned on and off like a tap. “This whole field needs a much lighter hand and more refined touch than Mr. Coyne seems disposed to apply to it.” Of course the percentage of foreign ownership in some industries was high, but that was not the point. The real question was “how do foreign subsidiaries actually behave? If they are behaving in ways that are contrary to Canadian interests how may these errors be corrected?” What angered him was Coyne’s inflammatory phrases, as one passage from the October 5 speech demonstrated: “I prefer to put understatement behind us…to speak not of non-resident control but of foreign domination.” That, Plumptre said, “to apply an understatement, is surprising.”³⁷

While not oblivious of the criticism of his speeches, Coyne was remarkably unperturbed by it. “I know [the bank board of directors] agreed with a great deal of what I said, but above all they said it was desirable I should say those things if…the views I held…[were] in the public interest…,” he told the Senate Committee on Banking and Finance in July 1961. But in February of that year some of the directors said that Coyne’s speeches were causing political controversy and that the Opposition was using them as a club to beat the government. The governor disagreed: “I do not think the Government was called upon either to agree or disagree with ideas which [I] was putting forward…but in view of the fact that the Government was busy disavowing any responsibility for monetary policy whatever, I can understand how some of this controversy developed. It was in this way, and only in this way,” Coyne maintained, “that it can be said that my speeches became the subject of political controversy. There was nothing partisan in anything I said, and in my view there was nothing hostile or adverse…to the present Government of Canada….”³⁸

The government increasingly was feeling otherwise. But the force of the complaints against Coyne was weakened by the supplementary budget Fleming brought down on December 20, 1960. To one observer, it seemed that the government had adopted the major thrust of the Coyne position with measures directed at the inflow of capital and at the flood of imports into the country. A withholding tax of 15 per cent was imposed on dividend and interest payments to non-residents while the profits of unincorporated branches of American companies were also to be subject to a 15-per-cent levy. The minister, one commentator wrote, was clearly trying to make foreign investment in Canada less attractive.³⁹

In the House, the Leader of the Opposition was quick to seize on any apparent differences – or similarities – between the minister and the governor. Under pressure, Fleming on February 21, 1961, replied to his criticism by stating that “in the field of monetary policy parliament has given the essential authority to the Bank of Canada and not to the government or to the minister of finance…parliament has given no power to the government.” Pearson was criticizing the bank, not the government, Fleming said, even though Pearson was speaking on the pretense “for his own partisan purposes” that the government has responsibility. He himself had no right to censor Coyne’s speeches. “He does not refer them to me. Why should he do so? This is a free country.”⁴⁰ But as one of Fleming’s colleagues noted in a message passed to him in the House of Commons, “If the Governor of the Bank is responsible to Parliament the Leader of the Opposition should move for his dismissal. We should agree. I do not consider that you should defend the Gov. of the Bk.”⁴¹

Who was to defend the governor? The Liberals exploited the issue but did not support the policies Coyne was proposing. Walter Gordon, for example, wrote to his leader that he had been impressed by academic criticisms of Coyne and the calls for his resignation that were beginning to be heard. To Gordon it was the confusion that Coyne was producing, not to mention the apparent confusion in the government’s economic policies, that was so disturbing. One day Coyne spoke out against foreign investment and the next day Fleming offered a contrary opinion. “Does this mean that Government policy has changed since Mr. Coyne made his speech…? Or does it mean the Government has two policies, one for home consumption and one for export?”⁴²

Fleming was as aware of the contradictions as was Gordon, no matter what the minister might say in Parliament. And when he saw Coyne in mid-March 1961 he asked the governor to cease making speeches. Coyne agreed, but the damage was already done.

II

The ostensible cause of the final clash between the governor and the government was a petty one. On February 15, 1960, after a nine-month study, the directors of the bank approved a change in the pension arrangements for the governor and his senior deputy. Henceforth, the two officers would be guaranteed a pension equal to half their current salary or, in the case of the governor, $25,000. This was a very large sum indeed in 1960, but when compared to the pension schemes offered the presidents of chartered banks, for example, it was modest. As usual, the board had discussed the change, approved it, and proceeded to implementation without either publishing it in the Canada Gazette or formally notifying the Minister of Finance. Publication of such business had been deemed unnecessary in the past according to legal rulings from the Justice department; and the minister surely did not require notice when his deputy minister (or, as it happened on the day the pension was finally approved, his assistant deputy minister) had been present at the board meeting. In addition, one board member, J.T. Bryden, president of the North American Life Assurance Company and a Diefenbaker appointee, had discussed the pension with Fleming at a Muskoka cottage as early as August 1959.⁴³

The pension was perfectly proper, but when Fleming, who had begun to believe that Coyne should be sacked, learned on March 21, 1961, that Coyne was now eligible for $25,000 a year when he left the bank, he was outraged. He had told Bryden on at least two occasions that Coyne’s salary could not be raised; now he must have felt that he had been circumvented.⁴⁴ But the real reason for Fleming’s anger was that after years of defending the governor against his colleagues, and with the economy in the doldrums and unemployment at its post-war peak, his patience was at an end.

On March 23, Fleming spoke at length to the Cabinet about his relations with Coyne. He had seen the governor on March 18 when Coyne had “expressed the view that the appearance of lack of unity between the Minister and himself, and the absence of any clear enunciation of the government’s economic policy, had increased the difficulty of explaining monetary policy to the public.” That was why he had made speeches, Coyne said, adding the opinion that Canada was “on the path to ruin.” Fleming told his colleagues that he felt “placed in the equivocal position of having to defend the Governor publicly while in fact he deplored the latter’s actions and disagreed with his proposals.” Then, Fleming went on, Bryden had told him on March 19 that the board’s confidence in Coyne had weakened and that a majority would oppose his reappointment as governor. In the circumstances, Fleming said, he sought authorization to inform Coyne privately that he would not be reappointed when his term expired in December 1961. “He would inform Mr. Coyne that no objection would be raised by the government if he should decide to proceed on retirement leave at this time…. Under the Pension rules of the Bank, Mr. Coyne would qualify for an immediate pension of $25,000 per annum if he completed his initial term.” Significantly, Fleming had made no derogatory mention of the pension, although in the discussion that followed some members of Cabinet did ask that the authority providing for the governor’s pension be checked.⁴⁵

The pension question was again discussed in Cabinet on March 30 when the Prime Minister reported a legal opinion from the Department of Justice that approval by the Governor-in-Council was unnecessary for the pension by-laws of the bank to be operative. He added, however, “The law officers had stated verbally that they believed that pension by-laws were probably not effective…until they had been published in the Canada Gazette…but they believed this case to be weak.” Despite that opinion, Diefenbaker pressed his colleagues to consider the pension matter, which “had not been communicated to the government or to the public. The by-laws had not been gazetted. These circumstances,” he said, “constituted a very clear reason why Mr. Coyne should not continue as Governor.” The Prime Minister suggested that the government should introduce a bill to amend the Bank of Canada Act “by providing that by-laws of the Bank would have no effect until they had been approved by the Governor in Council. The consequences of such a measure,” he continued, “would also put an end to charges that the Bank was ‘running’ the government.”⁴⁶

What had happened, and here the Cabinet minutes leave no doubt, was that the Prime Minister had turned the pension into the crucial question, notwithstanding legal advice. When the Cabinet next considered the pension on May 1, Fleming covered the whole issue once more, telling his colleagues that “there was no real ground for an attack on the integrity of the Governor, who had not inspired the by-law amendments that had improved his pension position, and had retired from the Board meeting when this subject was discussed.” That was a decent attitude, Fleming adding that the government’s reasons for seeking Coyne’s retirement were that he had repeatedly attacked the government’s fiscal policy in public, had embroiled the bank in public controversy, and had seriously impaired the morale of the bank by his actions. Whether those were correct analyses of the Coyne problem or not, Fleming’s points were at least legitimate grounds for proceeding to seek Coyne’s retirement. After a long discussion that brought out once more that there was no impropriety in the pension by-laws, the Cabinet agreed that legislation should be introduced after the departure of Coyne to make clear that all bank by-laws required approval by Governor-in-Council and publication in the Canada Gazette; that the legislation should not interfere with the operation of by-laws passed hitherto; that the government should not ask the directors to modify the pension by-law; and that the governor should be advised as soon as possible that the government not only did not intend to reappoint him when his term expired but also hoped that the governor would retire from his post immediately.⁴⁷

The next day, May 2, Diefenbaker told the Cabinet that “under section 14 of the Bank of Canada Act the Governor had the power to veto any action by his Board of Directors, and therefore Mr. Coyne had been involved in the decision to raise the amount of his own pension.”⁴⁸ This was a spurious position, reflecting nothing so much as the Prime Minister’s desire to find some way to strip Coyne of his pension increase, but the interjection was sufficient to delay further consideration until late May. The Prime Minister had also managed to cast doubt on the legality of the pension, and some of the more credulous ministers appear to have believed genuinely that some impropriety had occurred.

Still, nothing effective had yet been done to get rid of the troublesome central banker. How could this be accomplished? The problem was critical for Fleming because he was in the midst of preparing his budget for presentation in late June, the economic situation was shaky, and there was some concern that Coyne might break loose with speeches attacking the government’s budget if he was still governor when it was presented. It was, Fleming said years later, impossible to concert fiscal policies so long as Mr. Coyne was in a position to damn government policies and not co-operate in planning. On May 30 finally, after Cabinet meetings on May 26 and 28 had led to calls by several ministers for Coyne’s removal from office “at this time,”⁴⁹ Coyne was asked to meet Fleming that afternoon. The issue was about to be joined.

The fullest account of the meeting between Fleming and Coyne is in the minister’s report to Cabinet on June 8. Fleming told the ministers that the deputy minister of finance had been present when he told the governor that “on the instructions of the Cabinet, he was asking for the Governor’s resignation prior to the next meeting of the Board of Directors…scheduled to be held in Quebec City on June 12th.” The minutes record that “Mr. Fleming had referred to the speeches made by Mr. Coyne, to the public controversy in which he had involved the Bank, to the fact that Mr. Coyne’s ideas were irreconcilable with the plans of the government of Canada, and to the consternation of the Cabinet on learning of his most unusual pension arrangement and of his failure to disclose it to the government.” Coyne had then argued that the pension arrangement was legal and “he had declared that he did not withdraw any of the statements he had made in his speeches, but that he deeply regretted any embarrassment that they might have caused. He had asked whether a successor had been chosen…. Mr. Coyne had asked whether the government would permit him to receive the $25,000 pension following his resignation,” and Fleming, according to the minutes, had replied “that the by-law was of questionable validity, and that the government had been shocked by it and had not yet reached a decision in regard to it.”⁵⁰

According to Fleming’s later recollections, the meeting had been friendly and the two men had shaken hands on parting. Coyne’s recollection was that 90 per cent of the time was spent on the pension,⁵¹ but his subsequent correspondence with Fleming makes clear that other matters were also discussed. Fleming had told him that “the Government had under contemplation certain programmes which it was thought I would be bound to disagree with.” This puzzled Coyne: “So far as I am aware there is no question affecting Bank policy or operations at issue between us, and the Bank has in fact always cooperated fully….” Still, it was the pension issue that dominated the discussion. Fleming had suggested that the governor had acted improperly by not vetoing the pension by-law, “that I ought to have prevented the Directors from taking action in a matter of this sort, which is unquestionably within their power and responsibility….”⁵²

It was this slander on his integrity that so offended James Coyne. As he said years later, he would have departed quietly if he had been confronted with a detailed list of particulars; but he could not do so in the face of charges that he had acted improperly.⁵³ The evidence suggests that the claim of impropriety was completely groundless; so too was Diefenbaker’s later remark in Parliament that Coyne “sat, knew, listened and took.”⁵⁴ The government had anticipated that the governor would step down without a fuss. Fleming had prepared the board members for action, and he had a successor to Coyne firmly in mind.⁵⁵ But Diefenbaker and Fleming had misjudged their man.

The real battle was not yet under way. Coyne said nothing in public of Fleming’s demand for his resignation, and the minister too kept his silence. From May 30 to June 9, Coyne sought an accommodation, tried to discover from Taylor what was happening and, despite his talk with Fleming, simply refused to believe that the Cabinet was disturbed by the pension. He also talked twice with Bryce, who later remembered that he was seeing Diefenbaker by day and Coyne by night. But there were no indications that a peaceful settlement could be arranged, and in the meantime Coyne readied himself. He realized he could not hope to win a battle with the government, but he knew he could cause it damage and perhaps prevent it from using its power against other public servants.⁵⁶ The independence of the Bank of Canada was at risk if he did not fight, Coyne believed; so too was his good name.

The bank directors had their orders from the Minister of Finance, and Fleming was confident the directors would do their duty. At Cabinet on June 8, he had told the ministers that he expected Coyne might seek a vote of confidence from the board, but “he would not get it.”⁵⁷ Coyne, however, believed that if the issue really was the pension, the directors, who knew the full story, had to back him up. But he completely underestimated the ties of party loyalty, and at the board meeting Coyne soon realized that he had little support. Even the efforts to reach a compromise that would allow him to complete his term had failed. The government, Fleming told board members who urged him to relent, had reached its decision.⁵⁸

Faced with weakness of his “helpless, hapless, thoughtless” directors – or so the Toronto Star characterized them on June 15 – Coyne left the meeting and, through his office, released a statement that set out his side of the case and made clear that he would not resign.⁵⁹ Then he returned to the meeting, told the board of his action, and watched the directors vote 9 to 1 on the motion “That it is in the best interests of the Bank of Canada that the Governor do immediately tender his resignation to the Board of Directors of the Bank, and further that this action and decision on the part of the Board has been taken after prolonged consideration and with regret.”⁶⁰ In the House of Commons, Paul Martin, tipped off by a friendly journalist, asked Fleming if it was true that Coyne’s resignation had been demanded, and watched as the minister, taken by surprise, “turned red as a beet” and stammered out a reply. It was, Martin recalled, “this whole Coyne affair that laid the foundation for the fall of the…Diefenbaker government….”⁶¹

The affair was public now, and as it escalated it justified Martin’s assessment. Fleming gave Parliament his version of events on June 14. The Minister of Finance referred to the deterioration in the relations of the Bank of Canada with the public and to Coyne’s embroiling the bank in continuous controversy with strong political overtones. One sign was the governor’s rigid attitude on the maintenance of high interest rates, something that caused difficulties because “the Government’s policy is expansionist aimed at the creation of more trade, more production and more jobs.” Coyne, the minister said, stood in the way of the implementation of a comprehensive, sound, and responsible economic programme. Fleming then referred to the pension, accusing Coyne of lacking a “sense of responsibility in keeping with his high office, in accepting an additional benefit worth $13,000 per annum for life without ensuring that the matter was brought to the attention of the Government.”⁶²

Everything Fleming said fuelled Coyne’s anger, and the governor was not without resources. A flood of press releases, statements, and hitherto confidential letters and memos began to pour forth from the bank. So intense was the flood, and so devastating its impact, that Tories began to charge that Coyne had the services of an advertising agency paid for by the Liberal party, that he was misusing the bank’s resources in his counterattacks, that he had had some of his letters written for him by his old friend J.W. Pickersgill, and even that he was unbalanced. “The voice of Coyne,” Diefenbaker charged, “was the so-called conscience of Pearson and Pickersgill.”⁶³ In fact, there was no advertising agency, only one public relations officer in the Bank of Canada. And both Coyne and Pickersgill deny adamantly that anything more than occasional advice was offered by the ingenious politician to the governor. Finally, Coyne was not insane; he was furiously angry. What did disturb many at the time, and now leads Coyne to admit error, was the use of confidential correspondence to make his case.⁶⁴

Although the government had given notice in mid-June of its intention to introduce legislation declaring the office of governor to be vacant, the budget first had to be brought down. Coyne was quick to fire his first salvo at the budget before it was delivered. On June 19, he released copies of a paper he had sent to Fleming on February 16, 1961, entitled “The Requirements of Economic Policy Today.” The twenty-four-page memo argued that Canada could not achieve full employment and steady economic growth without major changes in economic policy, and Coyne laid out his prescription: reduce imports with a temporary tariff surcharge of 10 per cent; mobilize capital for investment; encourage regional development and savings; develop resources and create a national highway system; raise taxes; reduce the national debt; stabilize the dollar at parity with the U.S. dollar; restrain consumer credit; and use fiscal policy for the economic purposes of the state. It was a detailed programme, and Coyne said that if it had been put into place earlier there would have been no unemployment, no balance of payments deficit, no increase in net foreign investment in Canada, and a smaller overall tax burden. Coyne felt that his plan refuted Fleming’s charges that he was in favour of restrictionist policies, and certainly some of these proposals were expansionist. The Globe and Mail, however, was correct when it said on June 20 that Coyne’s memo called for “tightening belts.”⁶⁵

The budget of June 20 was not a direct refutation of Coyne. Fleming forecast a deficit of between $600 million and $700 million for the year and said that it would help stimulate the economy, one point of difference with Coyne. His announcement of the government’s intention to encourage a decline in the exchange value of the dollar, an attempt to improve the competitive position of exports, was another point of difference. But the Montreal Gazette was not far wrong when it noted that “the measures introduced by Mr. Fleming follow the general line indicated by Mr. Coyne with remarkable fidelity. There are variations of detail but not intent.”⁶⁶ If that was so, why the urgent necessity to purge Coyne? The Prime Minister on June 21 spoke in the House about Coyne’s suggestion of higher taxes and said, “A civil servant is entitled to give his views. But however exalted he must not place himself above the people’s representatives. No one can be allowed to impede national progress.”⁶⁷ Diefenbaker did not explain why Coyne’s advice was different from that of other civil servants or how it impeded progress.

There was no doubt, however, that Coyne was impeding the Conservatives’ moves to be rid of him. So too were the Liberals. Pearson said that while Coyne’s usefulness as governor had ended, his party was “determined to see that Mr. Coyne gets his day in court and to see that he is not used unfairly as a scapegoat” for the government’s economic mismanagement.⁶⁸

The Cabinet discussed the bill declaring Coyne’s office vacant on June 20, the ministers deciding to make no reference to the question of the amount of pension to be received by the governor. The Cabinet apparently believed that the fundamental issue, Coyne’s fitness for office when he had lost the confidence of the government and the bank directors, would be clouded if the pension issue were included. “In addition,” the Cabinet minutes note, “this was not an advantageous time for the government to adopt a firm position on the pension question, bearing in mind the probable attitude of the Opposition and the Senate in this respect….”⁶⁹ That reasoning was probably correct; much less explicable was the decision to refuse to permit the bill to go before a House committee where the government had a majority. Diefenbaker later remarked that Coyne “wasn’t entitled to that, Mr. Fleming denied him that.” It was, said the Chief, Fleming’s decision and one that Cabinet had ratified: “If we had allowed him that opportunity then he would have simply said: ‘Well they have decided against me and it was a plugged jury.’ ” Fleming, however, maintained that it was not on his advice that the Cabinet acted.⁷⁰ Whatever the origins of the idea, it was an error of the first magnitude. From the point of view of parliamentary strategy, R.A. Bell said years later, “I know of no greater black eye that any Government ever suffered.”⁷¹

The black eye was inflicted by the Senate, which stepped in and, with its large Liberal majority, gave Coyne the opportunity to be heard before the Standing Committee on Banking and Finance. And certainly Coyne wanted that. In a letter to Fleming on June 26, a letter promptly released to the press, Coyne charged the government with trying to prevent Parliament and the people from learning the truth about the affair. “What is at issue here,” Coyne said, “is the right of Canadians to know why I refused to meet the demand of the Government [to resign].”⁷² Coyne then made one of his few errors when he lashed out at the Prime Minister’s charges in Parliament that Pickersgill had dictated Coyne’s many letters and statements. “Mr. Diefenbaker,” the governor wrote, “has been the evil genius behind this whole matter. It was his unbridled malice and vindictiveness which seized on the…pension fund…as a clever stick with which to beat me, and intimidate me.” Coyne was entirely correct, but that charge nonetheless briefly lost him the high ground.⁷³

The bill sacking Coyne finally passed the House of Commons on July 7 after unruly debates, charges and countercharges, all fuelled by Coyne’s seemingly inexhaustible files. Now it was the Senate’s turn, but the Senators faced a difficult situation. It was a serious matter to reject a Commons bill, not least because Diefenbaker had threatened to make Senate reform an election issue if the Senate turned down the Coyne bill and a piece of tariff legislation.⁷⁴ On July 8, the Coyne bill was sent to the Senate Banking Committee.

“It was a hectic week,” wrote Liberal Senator T.A. Crerar to his family. “For once the poor old decrepit, senile Senators were in the limelight. Everyone agreed that Coyne made a strong if not devastating case against the treatment given him by Fleming and the Government.”⁷⁵ Indeed, that seemed the general response as the sympathetic Senators led Coyne, dignified and grave, through his story. The Liberals had been told by Pearson with great tact that “while they should give Coyne a chance to state his case in public, they should avoid any possible indication that they were in agreement with his policies,”⁷⁶ and the Senators did their job well. Angry Tories interrupted with objections, but Coyne outfaced them time and again, introducing his damaging evidence into the record. Yes, the by-law procedure used in the pension decision was exactly the same as that used before. No, the minister had never taken exception to the bank’s policies. Yes, Fleming had asked him in March to cease public statements and, except for an appearance before a Senate committee, he had obeyed.⁷⁷ Coyne was an impressive witness, and never more so than in his closing statement on July 12. Speaking emotionally, Coyne explained his actions over the previous month:

In the circumstances in which I found myself I felt that I had no right to take chances on the question of what procedural problems there might be [that might prevent a hearing in Parliament]; that I had to rely entirely upon my own efforts to see that public replies were made to misleading, incomplete and inaccurate statements made…by members of the Government….

I regret having said certain things, and I regret having done certain things – since May 30. I felt I was fighting for important principles, and fighting very largely alone against an extremely powerful adversary – so powerful, indeed, that it was bound to win in the end….

Now that the fight is almost over…I wish to say that I fully recognize that because of the events of May 30 and since – not because of anything that happened before that date – the management of the Bank of Canada must change….

A vote in favour of this bill, after this hearing, is a verdict of guilty. There can be no equivocating about that. I shall be marked for life as a man…declared…unfit to hold a high office of Parliament by reason of misbehaviour….

A verdict of not guilty will not prevent my immediate departure from office, but it will permit me to retire honourably and to hold up my head among my fellow citizens….⁷⁸

It was a brilliant peroration, “one of the most dramatic affairs I have ever witnessed,” H.W. Herridge, an NDP M.P. wrote. “When he had finished, Senators, M.P.s, Pressmen…were wiping the tears away from their eyes.”⁷⁹ Coyne’s speech had stiffened the Senators’ spines, and the committee thereupon passed a motion on July 13 that the bill should not be proceeded with and “that the Governor of the Bank of Canada did not misconduct himself in office.” The same afternoon, the whole Senate accepted its committee’s report. James Coyne had been vindicated, and he submitted his resignation at once.⁸⁰ The staff of the bank presented the governor with a gold medal lauding his “courage and integrity.” Not all the staff agreed with Coyne’s policies or actions; none, however, doubted his courage and integrity.

The Coyne affair had gravely damaged the Diefenbaker government. The administration’s economic policies had been demonstrated to be in disarray. The pension question, patently phoney, was used to smear the governor, and Diefenbaker and Fleming had turned the full power of the government against one man. They had achieved the impossible – making James Coyne, an aloof and sometimes arrogant man whose policies were not even supported by the Opposition, into a sympathetic figure. John Diefenbaker may have been the author of Canada’s Bill of Rights, but in this instance at least he seemed motivated more by vengeance than by justice. It was an unsavoury affair, and if it ended James Coyne’s career, it also clearly revealed the incompetence and ineptitude of the government.

—

Who now would succeed Coyne as governor of the Bank of Canada? In the circumstances, who would want the job? Fleming had no doubts about the man he wanted – Louis Rasminsky, one of the bank’s deputy governors – and he had made this clear to the Cabinet as early as June 8, 1961.⁸¹ Rasminsky’s appointment, he wrote to J.M. Macdonnell, “is one of the purposes which I had hoped to accomplish while I held this office…he is much more than a thinking machine; he is a gentleman.”⁸²

Born in Montreal in 1908, Rasminsky had grown up in Toronto. After graduating from the University of Toronto, Rasminsky had attended the London School of Economics. But he took a job with the League of Nations in Geneva before he completed his doctorate, and he stayed with the League until the war brought him back to Canada and a job with the bank. There he had risen quickly, establishing his credentials as an expert in foreign exchange and largely shaping the Canadian position for the discussions about a post-war world financial order. But in 1954 he had not been chosen for governor. Coyne’s selection had come as a blow to Rasminsky, one made all the more hurtful by the rumours that swirled around Ottawa that he had been passed over because, as he was a Jew, the chartered banks would not deal with him. There were also suggestions that the Cabinet itself had worried about Rasminsky’s faith in 1954, and it is worth noting that on June 8, 1961, when Fleming first broached Rasminsky’s name as a successor to Coyne, the minutes record the government’s resolve “not [to] be influenced by the possibility of criticism by anti-semitic groups.”⁸³

Rasminsky was the ideal choice for the post in 1961. But he did not want the job until matters were clarified, and the most important point was that the government had to accept its own responsibility for monetary policy. Fleming and his predecessor had evaded responsibility, and that evasion had led to the Coyne affair. The ministerial position was contrary to reality, and Rasminsky was determined to ensure that the government accepted its responsibility or he would not take the job.

The first formality was the selection of Rasminsky by the Board of Directors. That was no problem, for he was genuinely their choice.⁸⁴ Then Rasminsky had to talk with Fleming and to discuss the language of a letter he would write that would set out his position. That letter, as ultimately drafted, said things simply and clearly:

I believe that it is essential that the responsibilities in relation to monetary policy should be clarified in the public mind and in the legislation. I do not suggest a precise formula but have in mind two main principles to be established: (1) in the ordinary course of events, the Bank has the responsibility for monetary policy, and (2) if the Government disapproves of the monetary policy being carried out by the Bank it has the right and the responsibility to direct the Bank as to the policy, which the Bank is to carry out.

The first principle, Rasminsky said, was necessary to give the bank the independence to enable it to resist day-to-day pressures from any source. But if there were serious conflicts with the government, then “the Government should be able formally to instruct the Bank what monetary policy it wishes carried out and the Bank should have the duty to comply with those instructions.” The governor might have to resign in such circumstances, but at least no one could doubt where the ultimate responsibility lay. Rasminsky also added that “consideration should be given to setting up a routine procedure for regular meetings at fairly frequent intervals” between the governor and the minister.⁸⁵

Donald Fleming had no difficulty accepting this letter. His reaction was curious, to say the least, for Rasminsky was requiring the minister to accept a responsibility he had avoided consistently. But Fleming, ultimately a pragmatist, never had much difficulty in changing positions without embarrassment, and he “swallowed three pages of crow,” as the Toronto Star Weekly put it, to get Rasminsky.⁸⁶ The Prime Minister, however, was dubious, but when Rasminsky told him that “the job is impossible if the Government doesn’t take the same view as the Governor regarding the responsibility for monetary policy,” Diefenbaker went along after a few minor changes in phrasing.⁸⁷ At a stroke, Rasminsky, whose appointment was made public on July 24, had clarified the situation, and there could never be any doubt again that the bank’s monetary policy was the government’s.

One final note: the directors of the bank temporarily suspended Coyne’s pension in the midst of the affair in 1961 with, as Donald Fleming said, “our knowledge and approval.”⁸⁸ But after a review of the legalities, the directors lifted the suspension, and Coyne received the pension of $25,000 a year that had been the excuse for his firing.⁸⁹

III

The Coyne affair had seriously damaged the government’s economic credibility, and it had left Donald Fleming’s reputation in tatters. Reporters speculated freely that the Prime Minister would dump Fleming, and in late December rumours of a major Cabinet shuffle swept Ottawa. On December 26, the press took it as certain that Fleming was through, but two days later the shuffle turned out to be very minor indeed. Fleming, the press agreed, had refused to go quietly, and the business community, alarmed at the spending tendencies of the government, had told the Prime Minister in no uncertain terms that it wanted Fleming to stay where he was, a brake on the profligacy of his colleagues.⁹⁰ Whatever the reasons, Fleming remained Minister of Finance, and soon he had to face a new and serious financial crisis.

In one sense, the emergence of economic difficulties in mid-1962 was somewhat surprising. The economy seemed in good shape, and the new governor of the Bank of Canada had told the minister on January 2, 1962, that the country was in the midst of “a marked upturn,” the Gross National Product in third quarter 1961 being up 4.8 per cent. Unemployment had fallen to 6.5 per cent in November, and the current account balance of payments was also improving. Rasminsky then noted, however, that the recovery had been associated with “increasing government expenditures entailing a large budgetary and over-all deficit and a considerable degree of monetary expansion.” In the first three quarters of 1961, government expenditures had risen by 7 per cent, compared with increased expenditures of 2 per cent for the economy as a whole. “The increase in expenditures has been such that it would not be matched by increased revenues even under very prosperous conditions.” That concerned the governor, who said that in the present situation “an over-all Government deficit of the same magnitude as in 1961 – not to speak of an even larger one – would lead to a very difficult and perhaps dangerous situation in financial markets.” The confidence of investors in Canada’s financial stability might be impaired. Not that Rasminsky was calling for a balanced budget. That, he knew, was not possible. What he did suggest was that policy should be directed towards achieving “some reduction in this year’s deficit.”⁹¹

If only that had been possible. On February 27 the Deputy Minister of Finance sent Fleming his estimate of budgetary revenues and expenditures. The 1961-62 budget had predicted a $650-million deficit, but although revenues were slightly higher than Fleming had forecast, expenditures were up even more, with the result that the deficit was $791 million. For 1962-63, he estimated the deficit at $695 million – if there was a 7-per-cent increase in the GNP. Even in the best circumstances the deficit situation was an unhappy one.

And it was the deficits that primarily troubled businessmen in Canada and financial experts abroad. The Globe and Mail, for example, spoke for orthodox businessmen when it warned that “there can be an excuse for a deficit in a time of recession, but continuing deficits in a period of economic expansion can hardly be justified.”⁹² Abroad, the International Monetary Fund considered the performance of the Canadian economy “disappointing.” Its 1961 report on Canada was very critical, not least because of the deficits and the potential for inflation. The IMF was also unhappy with Canada’s “managed” exchange rate that kept the dollar at around ninety-five cents U.S. and repeatedly pressed Canada to move to a fixed par value.⁹³

Fleming’s budget of April 10, 1962, contained little to cheer the critics. The forecast deficit for the coming year was set at $745 million. And Fleming strongly defended the government’s decision not to peg the dollar, stating that the fluctuations in the exchange rate had been small, that Canada was not being unduly pressed by the IMF, and that before it fixed a new par value, the government wanted prospects for success to be better than they had been between 1946 and 1950, the last time Canada had operated under a fixed rate.⁹⁴ About all that commentators could say in Fleming’s praise was that at least he had not offered pre-election tax concessions. The voters, advised on April 18 that an election would take place on June 18, would judge.

Apparently speculators, foreign firms, and worried Canadians judged harshly. In the days after the election call, trends that were already apparent began to accelerate alarmingly. Canada’s official holdings of U.S. dollars and gold had stood at $1,921 million in January 1962, but in that month and in March there had been very large losses of reserves, and after mid-April the losses increased. The total decline in reserves since the beginning of the year, Rasminsky told an IMF board meeting studying the Canadian difficulties on May 2, amounted to $460 million⁹⁵ – or about 24 per cent – and that had frightened the government.

The dimensions of the crisis had been brought home to the Prime Minister only on April 29, when R.B. Bryce told Diefenbaker that when the April foreign exchange figures were published on May 5 the market might be difficult to control. For a government in an election campaign, one already being denounced for economic mismanagement, that was bound to be frightening.⁹⁶ By May 1, the Cabinet had decided to act, and on May 2, with the Prime Minister away campaigning in Quebec, the dollar was pegged at 92.5 cents U.S. – just three weeks after Donald Fleming had defended Canada’s managed rate. The IMF was supportive and greatly pleased.⁹⁷ Canada had acted firmly and the rot was checked.

So it was, temporarily. But the government had not been unanimous in its decision to peg the dollar. Diefenbaker later said, “I was alone, and I finally agreed” to Fleming’s importunities and the advice of “the so-called experts.” He said he “never claimed to be an economist although that is what I took my master’s in,” but maintained that if Canada had not devalued the dollar it “would have gone down, nobody would have had any concern…nobody would have cared.”⁹⁸ Others – Alvin Hamilton, for one – believed the crisis was caused by speculators in Toronto selling the dollar short, and Hamilton also argued for a peg lower than 92.5 cents on the grounds that this would be a “tremendous boost” for the campaign because of the stimulus it would give exports. And Fleming himself admitted there was no consensus in the Finance department on the rate.⁹⁹ Indeed, as Bryce noted in a memo written just before election day, he had been reminded that “par at 92½ was a compromise proposal” put forward by Fleming after hearing from his officials “all the arguments for and against various alternative proposals (5 in all) that were outlined.” Bryce wrote, “Parity at 92.5 was not proposed by any official. Mr. Fleming’s proposal of it was not objected to by his officials after they realized it was his choice, having heard the case.”¹⁰⁰ The firmness of commitment was not impressive.

No one yet knew how the decision had been made, but even so the financial community was not convinced of the government’s determination to defend the 92.5-cent exchange rate. That message was given to Fleming on May 31 by the Governor of the Bank of Canada who was, he said, worried by the behaviour of the exchange and bond markets. The government faced “a major financial crisis,” Rasminsky said, and although he was not suggesting specific steps at the moment, “I thought it right to put [the Finance minister] on notice that if my apprehensions turned out to be right it would be, in my judgment, essential for the Government to take action immediately after the election to restore confidence by indicating its determination to deal with some of our basic problems.” Fleming, faced with a difficult campaign in his own constituency, replied that “he thought that the lack of confidence [might] have been generated by the election campaign and that one was entitled to hope that the present atmosphere would change once the election was over.”¹⁰¹ Fleming, if not Diefenbaker, had been warned of the impending crisis.

The speed of the process increased on June 8 when Agriculture minister Hamilton told a Vancouver press conference that the 92.5-cent rate was a compromise and that he, for one, favoured a further drop to 90 cents, a “natural peg which is defensible with our negative trade balance.” That remark, as Fleming later said (incorrectly), started the run.¹⁰² Plumptre wrote on June 10 that the country’s reserves had fallen by one third since January, and “we cannot go on using up reserves at this rate; urgent steps are needed to restore confidence in the Canadian dollar.” Equally bad, there were signs that capital was fleeing the country, frightened by rumours in New York that the fixed rate was not to be defended or, alternatively, that foreign exchange controls would be set in place to defend it to the death. Hamilton’s Vancouver gaffe had fed the panic, Plumptre said. What was needed now was a statement affirming the government’s determination to defend the fixed rate. Such a statement by the Prime Minister might check matters temporarily, but in the immediate future “Canadians and foreigners with funds that can be transferred into or out of the country will no doubt be seeking some firm basis, in the realm of government action, relating to the future of the Canadian dollar.”¹⁰³ That night a statement of the sort Plumptre demanded was issued, but over Fleming’s signature. “I couldn’t get [Diefenbaker] to come out and make a statement,” Fleming said.¹⁰⁴

The statement calmed the markets slightly, although the electoral wars continued without quarter. The Liberals, sensing the disintegration of the government, criticized the fixing of the new par value at 92.5 cents, attacked Hamilton for his foolish comments, and roundly and soundly denounced Diefenbaker and Fleming for the mismanagement of the economy. The Liberals even issued “Diefenbucks,” green 92.5-cent dollar bills, based on a brilliant Winnipeg Free Press cartoon. The effect devastated the Tories and undoubtedly served to weaken confidence in the Canadian dollar. About all that John Diefenbaker could do was to say, as he did on June 14, that all was well. “The truth has been on our side. We have given you the facts. We have bared the record. We have concealed nothing and shaded nothing.”¹⁰⁵

IV

The government faced a difficult task in the election of 1962. The great sweep of 1958 could scarcely be duplicated again in the best of circumstances, and the circumstances, after its five years in power, were not of the best. There had to be losses, and the Conservative party’s aim was to minimize them.

The party planning for the campaign was set out for the members of the National Campaign Committee at the Chateau Laurier in Ottawa on April 15. Dalton Camp, the party’s advertising strategist, listed the election themes: Leadership, Achievement – Promises Kept, National Development, Program for the Future, and “The Same Old Bunch – the People Were Right in 1958.” It was to be a television campaign, the first in the party’s history, and the Prime Minister was to be accompanied by a field crew shooting news film each day.

The Tory strategists expected the issues raised by the Liberals to be three: “1. Get the country moving again. 2. The ‘team’ around Pearson. 3. With 1 and 2, the Liberals ‘have the answer’ to any and all problems.” And, Camp said, the Liberals could be expected to fix on unemployment and the GNP, the Common Market, and relations with the United States. “This is the familiar ‘Kennedy’ approach which appeals to the Grits because they must seek issues designed to influence pockets of grievance wherever they are to be found. And they must also divert the campaign from ‘leader’ issues which they have discovered are not likely to be helpful.” That, he went on, was why the Conservative campaign was to be focused on leadership, a reflection of the fact that, for all his problems, John Diefenbaker still projected a stronger image as a leader than did Lester Pearson. The Liberal “team” also provided a good target: “We can stress the heavy content of ‘experts’ and ex-Civil Servants on the ‘Pearson Team’, including, of course, Pearson himself. These were really the men who said ‘No’ – who couldn’t find the answers.”

That took care of the Grits. More positively, the Tory campaign was to stress “the broad Canadianism of the Conservative Party,” the party that had named the first Indian to the Senate, appointed the first woman and the first Ukrainian to the Cabinet, and had the first Chinese M.P. ever elected. “This is not a ‘team’ but a national movement exclusive only in its uniqueness in Canadian politics as a Party of all Canadians.” The government policy “has been universal and it has made hard decisions such as South Africa; it has stuck to principles; and it has shown an initiative and inspired direction, such as its drive in the export trade field.” And, Camp said, the more the Liberals attack the Prime Minister, the better – “when they do, they are fighting the campaign on our issue, our winning issue.”¹⁰⁶

That was the Conservative plan, and when the election was called on April 18, the party was ready. Well financed, generally well organized (except in Quebec, where there were serious problems),¹⁰⁷ and equipped with an able advertising group, the government also had the country’s ablest campaigner in Diefenbaker. The Chief was tired after five years as prime minister, but he had no match as a stump orator; and although his evangelical oratory was beginning to pall, particularly in urban areas, he still struck a resonant chord in millions.

But the Conservative record, the party campaign plan notwithstanding, was not all wine and roses. There was still high unemployment, and the economy, recovering from the worst days, was still shaky. There was growing tension with the United States over nuclear weapons. There was the prolonged squabble with the British over the Common Market. There was the impression that the party was “anti-intellectual.”¹⁰⁸ And above all, there was the perception that the government was not forceful or decisive. Diefenbaker might still lead the opinion polls when people were asked to select their preferred leader, but the Chief had begun to slip in the public mind thanks to the effective Opposition campaign in Parliament and in the country. The election was no shoo-in this time.

It was a race the Liberals thought they might win. During the year or so after the shattering electoral disaster of 1958, the party had been disorganized across the country and a shambles in the House of Commons. Pearson did not seem cut out to be Opposition Leader, and many Liberals feared the Conservatives would be in power for a generation. But matters turned around slowly, issues such as the Coyne affair gave the Liberals heart, and unemployment and the faltering economy cut into government support. The party began to seek out its Liberal roots, a process that the Kingston Thinkers’ Conference in 1960 and the National Liberal Rally in 1961 accelerated. And in the process good candidates began to step forward. The result, as a third-party strategist wrote in early 1962, was that “in recent months the Liberal party has succeeded in presenting to the public the image of a qualified ‘team’ of candidates who, if elected, would provide Canada with the capable leadership required for Government.” The observer had his doubts about this, for he believed that the Liberals were in the pocket of the interests. “Nonetheless the general public will continue to be persuaded that they are astute and public spirited men.”¹⁰⁹

That indicated that the Liberals were getting their message across. What the party had to do was to transmit the atmosphere of confidence and competence that now characterized it and to convey the team idea. The basic issues, all worked out at the 1961 rally, were employment, purposeful government, a national health plan and a pension plan, and Canada’s place in the world, and the strategy was to personalize “Mike” Pearson, to talk about socialists (not the just-formed New Democratic Party), and to criticize the Tories in a positive way so as to force Diefenbaker to respond negatively. It was, in many ways, a plan modelled on John Kennedy’s, just as Camp had said. Above all, the Liberal brass were convinced that Diefenbaker, after five years in power, could not fight the 1957 and 1958 elections over again by denouncing the party for its pre-1957 sins.¹¹⁰

The opinion polls also showed that the Liberal message was being heard. An April 1962 poll demonstrated that the Liberals ranked better than the government on “dealing with the issues,” and it identified unemployment as the key national concern. But, curiously, the members of the Liberal team added no strength. Diefenbaker himself led overwhelmingly on personality and ran well ahead of his party in popularity; the Conservatives also led on the strength of their team, although that was probably simply because ministers had built-in access to the media and patronage in a way the Opposition did not. Still, the Liberals were ahead by 40 per cent to 34 nationally, and a later poll, at the end of April, showed the lead to be 45 per cent to 38, a reading distorted by the Liberals’ lead of 53 per cent to 32 in Quebec but one that nevertheless suggested at least a Liberal minority.¹¹¹

The New Democratic Party, preparing to fight its first federal election, did not look good in those same polls, the Gallup showing it with only 9-per-cent support at the end of April, a disappointing showing for the new alliance between organized labour and the old CCF. The CCF, founded in the Depression, had never made great headway in Canada. In 1944, Tommy Douglas had led the party to power in Saskatchewan, forming the first social-democratic government in North America. Douglas had governed well and at length, but his success in Saskatchewan proved almost impossible to export. Alberta remained obstinately Social Credit in orientation, British Columbia appeared content to keep the CCF forever in opposition, and in Ontario the party always seemed to be rebuilding for a recovery that never arrived. Nationally, the high point for the CCF had been the September 1943 Canadian Institute of Public Opinion poll that showed the socialist party one point ahead of the Grits and Tories, a happy situation quickly countered by a massive free-enterprise campaign that squelched CCF hopes and by Mackenzie King’s skilful theft of CCF social welfare ideas. After the war, the party had won a number of seats in each election, but it had had to be content to jostle with Social Credit for third place in the party standings. The 1958 election, however, had seen Diefenbaker’s Progressive Conservatives steamroller the party, reducing it to a rump of eight seats, three from Ontario, one from Saskatchewan, and four from British Columbia, and to 9.5 per cent of the popular vote. If the idea of social democracy was to survive at the national level in Canada something had to be done.

The answer seemed to be the formation of a direct link with organized labour, which the CCF had long sought but which much of organized labour had resisted. In 1943 the Canadian Congress of Labour had endorsed the party as its political arm, but most often that pledge of support had amounted to very little of a practical nature. But in 1954 negotiations for the merger of the CCL with the more conservative Trades and Labour Congress of Canada began, and when they came to fruition two years later (not long after the parent American Federation of Labor and the Congress of Industrial Organizations in the United States had united), the new Canadian Labour Congress brought virtually the entire labour movement under one roof. As important for the CCF, the CLC in April 1958 had called for a “fundamental realignment of political forces in Canada in…a broadly based people’s political movement which embraces the CCF, the labour movement, farmer organizations, professional people and other liberally minded persons interested in basic social reform and reconstruction through our parliamentary system of government.”¹¹² Shattered by the election results of March 1958, the CCF accepted the invitation and the National Committee for the New Party, jointly formed by the CCF and the CLC, was soon in operation. The farm organizations declined to participate, but New Party Clubs, open to anyone, were soon organized as a way around such opposition. “New Party clubs were intended as the vehicle by means of which both ‘intellectuals’ and groups of the ‘general public’ could come into the new party movement,” a discussion group reported, but neither group had shown “any spontaneous desire” to do so.¹¹³ The New Party was going to be very much the product of the CLC and the CCF.

That troubled many in the three years the New Party was in gestation, and there was much heart-searching within the CCF ranks. Some members of the party’s tiny parliamentary caucus, men like H.W. Herridge of British Columbia and Douglas Fisher of Port Arthur, Ontario, feared the influence of big labour on the CCF’s “pure” socialism and suggested that labour would deliver very little in the way of votes in return for the surrender of the CCF’s existence. But the doubters were partially silenced when Walter Pitman, a New Party candidate, captured the constituency of Peterborough in October 1960, an event that persuaded many that industrial Canada was receptive to the still unorganized new alliance.

The result was a huge and well-organized New Party convention in Ottawa in the summer of 1961. The 2,084 delegates gave the party the name “New Democratic Party” and selected Premier Douglas of Saskatchewan to be the national leader, awarding him the prize on the first ballot by a convincing margin – 1,391 to 380 over Saskatchewan M.P. Hazen Argue. But the NDP, at least in its parliamentary caucus, was still divided, and there remained substantial resentment about the way the party “establishment” had ramrodded the merger with the CLC and the selection of Douglas. Herridge, who was NDP house leader until Douglas made it into Parliament, wrote, “…I am not very popular…because I do not believe in being told what I should think…. Never have I known so many people preaching the Brotherhood of Mankind who had so little of the milk of human kindness in their veins.”¹¹⁴

Hazen Argue in particular was unhappy, and in February 1962 he jumped ship to sign on with the Liberals. In January 1962, Argue himself had told Douglas Fisher that “this ‘Liberal’ talk is amazing. I don’t know where it got started. I have denied it and it keeps on,” but he added with some evident bitterness that “the great T.C.” Douglas was good “at P.R. but with no substance….”¹¹⁵ A month later he was gone, and the best the shaken NDP could claim was that the defection had galvanized the caucus, the party secretary telling Douglas that if the M.P.s had been “leaderless and disjointed” before, they were so no longer. “Argue’s defection has united the group as nothing else could have done.”¹¹⁶ The NDP had potential strength in the West and in Ontario, but new leader and new party or not, it was hardly in the best of heart for the coming fray.

Social Credit was different. In the West, the “funny money” party had the substantial organizational and financial support of Premier Ernest C. Manning’s entrenched and popular government in Alberta, and the new national leader, Robert Thompson, was a Westerner – by way of Ethiopia, where he had, among other duties, commanded the Imperial Air Force Academy and been a director of Haile Selassie’s Ministry of Education. But the new action in Social Credit was in Quebec, where Réal Caouette, an automobile dealer from Rouyn, had electrified the party organization.

Social Credit had existed in the province ever since the victory of William Aberhart in Alberta in 1935 brought the party’s ideas of monetary reform to public notice. But Social Credit doctrines had initially made very little headway in French Canada, and in the party’s first effort to elect candidates to Ottawa in the 1940 election, its candidates were easily defeated. But a base had been established, there was a newspaper, Vers Demain, and over the years the Social Credit movement in Quebec perfected its message and learned how to pitch it to appeal to French Canadians. There were assurances that Social Credit doctrines were not in conflict with those of the Church, and there was a heady mix of nationalism and autonomy, including opposition to conscription during the war. By 1945, the party felt able to put up forty-three candidates in Quebec in the general election; none was elected, and the party attracted only 4.5 per cent of the popular vote.

There were soon tensions between the Quebec party and the Alberta-dominated national organization. By 1947, established Social Credit was becoming more moderate and was shedding its allegiance to the doctrines of the founder, Major C.H. Douglas; but in Quebec, the Douglas monetary reforms continued to draw support from ardent followers, and there was a split along linguistic lines. At about the same time, as the historian of Social Credit in Quebec, Michael Stein, has noted, Réal Caouette and Laurent Legault were coming to prominence in the party. Caouette, then a salesman, and Legault, a party organizer, became convinced that the keys to success were broad, catchy slogans, personality, and effective organization. That combination had won Caouette election to Parliament in a 1946 by-election, and it was the same formula that Caouette would practise with success in Quebec early in the 1960s. Caouette in 1958 had organized Le Ralliement des Créditistes, a breakaway group from the provincial party, and had become its leader. The old-line Social Crediters had thought of themselves as a movement; Caouette wanted a political party to fight and win elections, a pragmatic organization that would allow him and his supporters to promote their beliefs through the political system. And Caouette hit on television as the way to advance his cause. Political telecasting was still novel in 1958, but the glib and silver-tongued Caouette quickly attracted a devoted audience for his talks, which were soon being seen in most of Quebec. At about the same time, Caouette linked the Ralliement to the national Social Credit party, which had been completely eliminated from the House of Commons in the Diefenbaker sweep of 1958.¹¹⁷

Thus the basis was laid for Caouette to make an impact in the 1962 election. His TV broadcasts effectively capsulized the discontents of Quebec’s poor, left out of the prosperity of the preceding years, mixed with doses of nationalism into spell-binding oratory. The programmes also produced contributions that helped the Créditistes to organize the back counties, and a flood of basic political advice went out from Ralliement headquarters to candidates and supporters, most of them newcomers to electoral politics. The best advice, conveyed to all, was “NE PAS PERDRE LA TÊTE,” and the organization committee president prepared a draft budget for each candidate that projected $2,150 in expenditures for his constituency.¹¹⁸ On that budget, the wonder was that the Créditistes could get anywhere. But something was going on in Quebec, and at Caouette’s campaign kickoff on May 6 there were more than five thousand cheering supporters in attendance. The crowd purchased ten thousand photographs of Caouette and 14,000 ball-point pens. Under their nihilistic slogan, “Vous n’avez rien à perdre,” the Créditistes were on the march.¹¹⁹

No one else was marching in a lacklustre campaign. John Diefenbaker, to many, seemed at first only to be going through the motions, and his special assistant noted that he was “a very sick and nervous man…so irritable and suspicious and unreasonable. And he was allergic to advice.” John Fisher, the publicist and broadcaster who had entered Diefenbaker’s service in 1961, quoted the Chief as saying, “I’ve been betrayed. Nobody is helping me. I get no advice.” He was at the end of his tether, Fisher remembered.¹²⁰ In part, the Chief’s black mood was caused by the dollar devaluation, a decision that, if only because of its timing, the Prime Minister could see would have an adverse effect on the campaign. The Diefenbucks proved him correct.

But Diefenbaker and his supporters put the best face possible on the devaluation. A “Campaign Memo” of May 25 talked about devaluation’s stimulative effects, how it helped exports and reduced imports and thus encouraged domestic production. “The Canadian consumer can buy Canadian-made goods in all of these fields and will now be buying more of them. Is that bad?” The Tories also professed pleasure at the quiet campaign. “A quiet campaign works for the government. The plain fact of the matter is that the contending parties have not been able to create any of the excitement or any of the issues that the Prime Minister developed so spectacularly as the contender in 1957 and 1958. If the campaign has been quiet, it’s been because neither the Liberals nor the N.D.P. have been able to make it otherwise.”¹²¹

On May 30, however, the campaign heated up at a Diefenbaker rally in Vancouver. There were seven thousand people in the arena, and while most were prepared to Follow John yet again, the audience included representatives of the unemployed, the ban-the-bomb groups, and others disaffected by government policy. The result was a near riot with fists thrown, jeers, and placards waved to such an extent that Diefenbaker could barely be heard. A leading B.C. Tory later told the Prime Minister that “we never expected hoodlums and goon squads would gang up at the Forum, particularly as your government has done so much to help the unemployed.” It was the NDP that had organized it, he said.¹²² Whoever organized the riot, it helped Diefenbaker, giving him back some of his 1958 fervour, and in the last two and a half weeks of the campaign, the Tories came to life. The Gallup Poll released on May 26 showed the government with 36 per cent; that on June 6 gave them 32 per cent; and the final pre-election poll a week later showed that Diefenbaker had recovered to 36 per cent.

The Liberals, on the other hand, dropped steadily, sliding from 44 to 42 to 38 per cent on the last poll.¹²³ “We are leading,” National Campaign Chairman Walter Gordon had wired to all candidates on May 21. “Confidently expect Liberal victory,” he had telegraphed on June 15. “Suggest you stress to voters the fact that only our party can win a working majority in the next House of Commons….”¹²⁴ But in fact the Liberals were starting to panic about the situation in Quebec, the area where they had counted on returning to their traditional dominance. Senator Chubby Power, party warhorse and legendary Quebec organizer, had charge of the twenty-eight ridings in the Quebec City district. His initial survey on April 30 put rouge chances at eight excellent, five good, five doubtful and five bad, and he did not mention the Créditistes at all. On May 22, his estimates showed eight excellent, seven good, six bad and seven doubtful in an area that at dissolution had had twenty-three Conservatives and five Liberals. Again, Social Credit was unmentioned. But on June 7, his last report, the Créditistes had suddenly become a factor in fifteen ridings.¹²⁵

Power did not know what was happening. He wrote to a friend on May 29 that up to then Liberals had welcomed Social Credit’s rise on the grounds that this could only hurt the bleus, already badly weakened by the absence of a Union Nationale government to assist them. “Up to the present the Tories have been attacking Social Credit but our people have left them alone, but if their movement continues to grow in importance it may be necessary for our candidates to turn on them also.” It all puzzled Power. “These people have very little in the way of argument that one can rebut, their whole campaign being largely based on the idea that people are disappointed in the major parties and that they might find some hope in voting for a party of the people.” Even so, Power calculated that Caouette might take two seats at best. But he did add a qualifier: “…as you know, the damn thing snowballs, and once it gets started you don’t know where it will end….”¹²⁶

The results demonstrated that Canada was to have a minority government. Diefenbaker’s party hung on to win, falling 17 per cent in the popular vote and returning 116 members to 100 for the Liberals, 19 for the NDP, and an astonishing 30 for Social Credit. Caouette’s Créditistes had taken 26 seats in Quebec and won more votes outside Montreal than either the Liberals or the Conservatives. His success confounded the experts and unquestionably deprived the Liberals (who won 20 of their 35 Quebec seats in Montreal) of their chance at power. In the process Diefenbaker’s 50 seats in Quebec in 1958 had shrivelled to 14. In Ontario the Tory decline was almost as precipitous, the party falling from 67 to 35 seats. Only on the Prairies did Conservative strength hold, but even there the party lost 5 seats. The Liberals won 14 in the East, 35 in Quebec, 44 in Ontario, 2 on the Prairies, and 5 in British Columbia and the North. The NDP won a seat in Nova Scotia, 6 in Ontario, 2 on the Prairies, and a surprising 10 in British Columbia. Tommy Douglas, however, failed to win in Regina, a victim of the bitter battle over medicare in his home province.

The Tories were left strong in small towns and rural areas, saved by the fact that there had as yet been no redistribution in the 1960s to cut away at the rural rotten boroughs. Their supporters could be characterized as those over fifty years of age, English-speaking, and having only secondary school education; they were Protestants, non-union labour, farmers, or white-collar workers.¹²⁷

The Liberals were pleased with their gains – the 1962 result was in truth a remarkable organizational achievement in only four years since the 1958 débâcle – but far from complacent. Tom Kent, Pearson’s chief policy adviser, wrote that the party had not effectively made out a positive case for voting Liberal. “We underestimated the extent to which marginal voters, disillusioned by the Tories, would remember that a few years ago people had become tired of the Liberals. Too many decided that they might as well try something new.” The voters had judged the two old parties as Tweedledum and Tweedledee, Kent said. Next time, the Liberals had to say “positively, definitely, simply, convincingly” that Canada would be different “in ways that matter to ordinary Canadians” if the Liberals were returned.¹²⁸

The results were shattering to Diefenbaker. As early as June 1961 in the midst of the Coyne fiasco, the Prime Minister, feeling the strain, had begun to suggest to friends that he should resign. In September 1961 he had said this again to Gordon Churchill, and in January 1962, Churchill had openly accused Fleming and George Hees of being in league with Toronto businessmen in a plot to drive Diefenbaker out of the prime ministership. Now, faced with election results that Churchill called “simply appalling,” the Chief was again in bleak mood.¹²⁹ The Governor General, Georges Vanier (who had been named to the viceregal post in 1959), seeing the Prime Minister after election day, noted that he was “not sure the PM is happy to be the incumbent.”¹³⁰ And Lester Pearson noted there was much to be said “for leaving the responsibility for cleaning up the mess to the government which created it. Short of winning with a good majority, this situation is preferable, until we can secure a decisive victory….”¹³¹

Perhaps that was true. In any case, the election had burst the myth of Diefenbaker – “he sagged like a pricked balloon,” one journalist wrote.¹³² The Chief had led the triumph four years before, but now his party and his reputation were in disarray, not least because of the shaky economy, the financial crisis, and doubts about the Chief’s desire and perhaps his fitness to govern. Even strong Tories felt the change in mood. George Hogan, who had worked long and hard for the party, wrote privately that Diefenbaker had arrived at a low point earlier reached by Macdonald and King: “…large numbers of Canadians were prepared to believe them capable of any depth of chicanery…. Large numbers of Canadians have built up a hostility to their Prime Minister which makes them predisposed to believe anything critical of him, and predisposed to disbelieve the contrary.” The best Hogan could foresee was that people still might be prepared to vote for Diefenbaker “if the issues were presented in the right way.”¹³³ The Tories faced an uphill battle.

V

In terms of the fiscal and economic situation, the election results were as bad as they could possibly be. A minority Diefenbaker government might be expected to be even more spendthrift than the majority government that preceded it. And with the balance of power held by “funny-money” Social Credit, no one had much confidence in the type of deals the Conservatives might be forced to make to survive.

The officials in Finance, the Bank of Canada, and other concerned departments were aware of all this. As early as the end of May Rasminsky had begun to think of the kinds of measures that would be necessary after the election, regardless of its results, to restore confidence in the dollar. On June 12, he had produced a draft plan,¹³⁴ and he was part of an officials’ committee that had a formal proposal ready on June 17, the day before the election. The officials laid out the situation, mincing few words. The exchange reserves had been cut in half in just six months, and there were fears of a flight of capital. The country could be brought to its knees if action were not taken. How had it all happened? One cause was the consistent balance of payments deficit on goods and services, aggravated by the outflow of capital. Another was the widespread criticism over the size of the federal deficits: “It is pointed out, over and over again, at home and abroad, that Government spending seems to have got out of hand” and those concerns “have been translating themselves into misgivings about the value of the Canadian dollar.”

What could be done? It was risky to un-peg the dollar and only slightly less dangerous to lower the par value to 90 cents. Nor was it practical to put foreign exchange controls in place. Instead, the mandarins suggested defending the dollar at its present level and “an immediate and impressive announcement of a combination of financial policy measures designed to restore confidence in our financial situation and our ability to defend the established par value of the Canadian dollar.” Measures had to be undertaken to tackle the deficit and the balance of payments, and to this end the officials proposed that Canada secure standby credits of $1 billion, cut the budget by “not less than $200 million in a full fiscal year” and preferably by more, and slap temporary tariff surcharges on a wide range of imports. The net effect, they said, would be to reduce the foreign exchange deficit by $600 million in a year.¹³⁵

Faced with this advice and with the continuing crisis – the reserves continued their slide – the battered government had to take some steps. On Friday June 22 Diefenbaker released a statement promising that on Sunday next the government would announce measures to improve the balance of payments and reduce the deficit. There would be no exchange controls, he said, and the value of the dollar was to be “firmly” maintained.¹³⁶ But that was all that was agreed. The officials were absolutely convinced that unless the announcement of budget cuts was tied to specific departments nothing would result. Fleming was in agreement,¹³⁷ but the rest of the Cabinet began to wobble. At one point the Prime Minister called Rasminsky to urge him to announce an increase in the bank rate instead of the package of measures desired by the officials’ committee. Rasminsky, terribly concerned, refused, and on June 23 he wrote to the Prime Minister to say that he was “disturbed at the information that the Cabinet is considering not publishing any details regarding the $200 million of expenditure cuts which I was informed yesterday had been decided upon…but instead may confine itself to the general statement that expenditures are being reduced by $250 million in a full fiscal year.” How could such a measure increase confidence? How could Canada expect to get more than a billion dollars in loans and credits abroad on such a programme? It was absolutely essential that the programme carry conviction, he said, “for unless it does it cannot succeed, and the nation will have gone further into debt through the foreign borrowings which are contemplated.” Rasminsky’s tough letter had its effect. After another call from Diefenbaker, Rasminsky wrote again to express his pleasure that the decision to cut government expenditures by $200 million during the fiscal year was firm and that the precise cuts were soon to be settled by Treasury Board.¹³⁸

The package was announced by the Prime Minister on June 24. His statement, Diefenbaker said, was made in response “to an increasing degree of uncertainty and instability in the last few days,” and included a 5-per-cent surcharge on $2.3 billion of imports, a 15-per-cent surcharge on luxury imports, and a 10-per-cent surcharge on deferrable imports. Tourist duty exemptions were cut sharply as well. Those measures were expected to produce $300 million, and in addition the government pledged to cut $250 million in expenditures. Then the Prime Minister detailed the borrowings and credits arranged in the United States, the United Kingdom, and with the International Monetary Fund and the Export-Import Bank in Washington. And, although this was not announced in the statement, the Bank of Canada simultaneously raised the bank rate to 6 per cent.¹³⁹

The crisis was over. The government applied the expenditure cuts ruthlessly, ordering departments not to fill staff vacancies, to slash repair and upkeep spending, and to cut travel and supplies budgets.¹⁴⁰ A committee of officials was set up to plan longer-term measures such as increased hydro exports and measures to stimulate tourism.¹⁴¹ By July 3, Rasminsky could write to the Governor of the Bank of England that “the pressure against us has completely disappeared and we have been able to recoup some of our losses on a modest scale.”¹⁴² Indeed, the reserves increased rapidly to $2.1 billion at the end of July, to $2.33 billion the next month, and by the end of 1962 the holdings were $2.54 billion or a half-billion dollars more than at the beginning of 1962. Interest rates also fell rapidly and at year’s end were at 4 per cent, a rate that the Bank of Canada said reflected “the reappearance of an appreciable inflow of long-term capital into Canada.”¹⁴³ Similarly the import surcharges were quickly dismantled. As early as August 31 some surcharges were lowered, more cuts followed in November, and all had been lifted by March 31, 1963. The revised estimates, tabled in Parliament on October 18, showed cuts in spending of $228 million, but the deficit was still estimated at $570 million, substantially below Fleming’s budget figure but well above the figure projected by the government during the crisis.¹⁴⁴

Despite the crisis, the economy had boomed, and the government could tell itself with some justice that it had brought prosperity through its devaluation of the dollar. Unfortunately, few now believed the Diefenbaker government when it talked about the economy, and the Liberals, echoing the press, charged that Diefenbaker had hidden the crisis until after the election. Even when things went well, the Conservatives found difficulty in receiving the credit. And, as the nuclear crisis with the United States demonstrated at the same time, few things were going well for the government by late 1962.