ADMS 1010 Lecture Notes - John Diefenbaker, Hard Currency, Quick Ratio
Canadian Economy (Cyclical expansions of 3 stages)
•Demand for consumer goods, infrastructure expenditures, housing, strong
immigration. Inflation , unemployment↑ ↓
•Recession: government heavily invest in defence. Inflation , unemployment↑ ↑
•Canadian dollar appreciated. Inflation , unemployment↓ ↑
Bank of Canada
•The goal of monetary policy is to rising living standards for all Canadians
through low and stable inflation.
•Graham Towers (governor) not actively pursue on monetary policy, he only
changed the bank rate twice.
•Later took over by Coyne (governor), he changed the bank rate 6 times and
raising it each time.
•Coyne emphasized the impact of inflation, encouraged economic growth and
•He continue to against inflation, because Inflation causes inefficiency,
injustice, produce recession.
•To the bankers: He demanded the bank has to have 15% liquidity ratio and
8% cash reserve.
•This high ratio made the bank become less flexible and led the central bank
to have full control of charter banks’ asset.
•Later, he replaced the fixed bank rate with a floating rate, because 1) a rate
higher than market rate can discourage borrowing, 2) floating rate can
respond quickly to changes in market.
•Also, he proposed that the banks have to create new saving banks to fund
long- term investment.
•Although bankers opposed this implementation, they had little choice but to
Government changed to Conservative ( under John Diefenbaker)
•Donald M. Fleming who was a finance minister, against Coyne’s ideology of
inflation and rising bank rate.
•The Bank of Canada rejected the tight- money policy. Rather, the bank called
its policy one of “sound money”.
•People lost confidence in the ability of the Bank of Canada. The tight money,
high interest rates, high- priced Canadian dollar depress economic activity.
They began to call for new management of the Bank of Canada
•Critics found that Coyne raised interest rate is wrong. It is because saving
rate is determined by salary than by interest rate. Raising interest rates puts
pressure on the economy, which slows growth. And his tight monetary
strategy unsettling to the business climate across the country and the
•Caused the issue of Coyne Affair: the relationship of the bank to the
government. Since Coyne’s policy was unpopular, the government declined
to take responsibility. The questions were raised whether government had
power over the bank or the bank had become an independent agency.
•Finally, Coyne resigned.
Louis Rasminsky (took over Coyne)
•He thinks that the 1) bank has the responsibility for monetary policy; 2) if the
government disapproves of the monetary policy, it has the right to direct the
bank as to the policy being carried out. In a sense of belief that bank should
maintain its independence without over-control by the government.
•He has a good relationship with the minister Fleming and work to repair
relationship with the banks.
•Lack of clarity regarding the relationship between the power of government
and the governor.
•Prime Minister- Diefenbaker displayed lack of political management skills, but
rather focusing on Coyne’s pension as the cause for dismissal.