Obviously, the conduct of monetary policy is extremely important to the nation’s economy. A properly conducted monetary policy can be very beneficial, whereas errors in monetary policy can have severe effects on the economy, either due to the creation of too much or too little money.
Who should make such important decisions? Some people believe that the financial experts at the Bank of Canada, who possess specialized knowledge of monetary matters, should have the responsibility and the power to decide the nation’s monetary policy. Other people disagree. They argue that such important policy decisions should not be made by the appointed officials at the Bank of Canada, but rather by the government, which was elected by (and is ultimately responsible to) the people.
The question of who possessed the final responsibility and authority for monetary policy remained somewhat vague until 1960, when matters came to a head in the celebrated “Coyne affair.” James Coyne, governor of the Bank of Canada, was pursuing a tight-money policy at the same time as the federal government was trying to stimulate the economy with budget deficits. When Coyne refused to alter the Bank of Canada’s policies, the government in effect dismissed him by introducing legislation declaring his position vacant. By this act, the government established itself as the final authority in the area of monetary policy. This was given legislative authority in amendments to the Bank of Canada Act in 1967, which stated that in the event of disagreement between the government and the Bank of Canada, the government can direct the central bank in writing as to the monetary policy to be followed.
Supporters of the government’s authority over the Bank of Canada argue that, without this authority, the government cannot ensure that the Bank of Canada’s monetary policy is consistent with the federal government’s fiscal policies, and point to the Coyne affair as evidence on their behalf. Critics of the government’s authority over monetary policy have little faith in the economic judgement of politicians.
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