Hell or High Water

by Paul Martin

  David and I also discussed an even more urgent decision I had to make. John Crow’s term as governor of the Bank of Canada was about to expire in January, and the government would have to decide whether to reappoint him. Crow was a controversial figure in Canada, both because of his rigid focus on inflation and because of his testy personality and a take-no-prisoners rhetorical style. At the same time, he was a top-ranked central bank governor and was highly respected by the markets, which would be looking to us to prove our monetary bona fides by keeping him in place. Like any new government, we were treated with caution, if not suspicion, by the financial community. Although I had a business background, the meticulous fiscal reputation of Liberal prime ministers such as Louis St. Laurent had long been displaced, and I knew this was an obstacle I had to overcome. John Crow symbolized monetary probity to the markets, so I wanted him to stay. Jean Chrétien wanted him to stay for the same reason, despite having been very critical of him when we were in Opposition. If we let him go, we thought, it was going to be a major blot on our economic copybook before we even got started.

  I very much appreciated that Crow, like Dodge, came down to Windsor and met with me in the chaplain’s office at the Hôtel-Dieu and later over dinner. I told him that I supported his fight against inflation and I understood the need to preserve the independence of the central bank. Under the law in Canada, the government can give directives to the bank, and the governor of the bank can resign if he or she deems them unacceptable. But that would be a calamitous political and economic crisis, similar to the one that rocked the Diefenbaker government in 1961 when it tried to fire the governor, James Coyne, who was pursuing a “tight money” policy. I wanted to make sure that Crow and I could work together. I was worried that raising interest rates at the wrong time could injure the fragile Canadian economy. It was still adjusting to free trade with the United States, and we had not yet felt the upturn that was taking place south of the border. At that initial meeting, we did not discuss precise details, but I was hopeful that Crow would prove to be someone with whom I would be able to work.

  As the days passed, with me shuffling back and forth between meetings in the chaplain’s office and my mother’s bedside, her periods of consciousness grew fewer and fewer. More and more of the extended family gathered, bidding her farewell in the hospital room. For her, it was an agonizing week before she finally gave up her last breath. Once again, not much more than a year after my father’s funeral, it fell to me to give the eulogy. Perhaps because my father was a public person and my mother was much more private, I found it a more difficult eulogy to give. Or perhaps it was because, as family tradition would have it, I take after my mother more than I do after my father. But it was not hard that day to fill the church with love and laughter.

  “My mother just simply had a tremendous effect on anybody,” I told the congregation. “Those of you who have been in our house and have seen the pictures know that many of them show my father with the great people of the world; and they’re engaged in sober conversation, barely smiling. And then you see other pictures of the same great people, and they’re smiling. Inevitably it’s because my mother is in that picture.”

  I finished the eulogy with the story of a dream that my mother had recounted to Mary Anne and me just a few weeks before her death. In the dream, my dad was calling to her and saying, “Nell, come.” Naturally we had lumps in our throats as she told us this, and we asked her what she had replied in the dream. She told us she answered, “Paul, I’m not coming. I’m not ready yet. Somebody else can get your coffee.” The story created a great wave of laughter through the church. And then I told them what I truly believed, which was that she had been ready, and her time had truly come.

  Hundreds of people came to my parents’ home for a reception that turned out to be a great celebration of her life. Soon after, Dwight Duncan, then on the city council and later a provincial cabinet minister, proposed that a new variety of rose that had been developed in Windsor be named the “Nell Rose.” What a touching tribute that was!

  Soon after, I returned to Ottawa. I was beginning to wrap my head around some of the crucial issues I faced, the most urgent of which was whether to reappoint John Crow. Under Michael Wilson, one of my Conservative predecessors, the government had agreed with the Bank of Canada on a five-year plan to reduce inflation. There was one year left on the agreement, which at that point called for an inflation target of 1 to 3 per cent. I talked with David Dodge and said that we needed to establish an understanding with Crow on what the future target would be before reappointing him.

  In my view, we were only going to dig ourselves out of our economic difficulties if the fiscal policies we adopted worked hand in hand with the monetary policies pursued by the bank. I didn’t want to reappoint Crow only to find out later that we could not agree on our inflation target. His definition of price stability was widely interpreted to mean zero inflation. I fundamentally disagreed with that, because only a small slippage would tip us into deflation, which would have huge negative economic implications. My fear was that he might view the next round of target setting as an opportunity to make a major downward move. I believed in setting low inflation targets, but if the bank drove interest rates up too high with the goal of lowering inflation, that could send the economy into a downward spiral at a time when it was already vulnerable by raising to prohibitive levels the costs that businesses pay for borrowing or people pay for mortgages. If that happened, my only resort then would be to dismiss Crow — or live with the consequences.

  So my idea was to settle on the targets, then reappoint him. Within the department, we decided that the inflation target should continue to be a range of 1 to 3 per cent, with the midpoint — 2 per cent — being the critical number.

  It was clear from very early on that Crow was unwilling to accept the 2 per cent midpoint. His position was that the inflation band should be lowered and reset as 0 to 2 per cent. On the face of it, while the gap was significant, it did not seem insurmountable, and I wanted to find a compromise if we could. Not the least of my worries was that if we did not reach an accord, and I decided not to re appoint Crow, the financial markets would see this as a signal that we were not serious about inflation. Crow’s deputy at the bank, Gordon Thiessen, who was just as adamant in his belief in wrestling inflation to the mat, shared our concerns about the dire consequences of losing Crow. He became a crucial intermediary, along with David Dodge, between Crow and me. One suggestion they discussed was keeping the top of the band at 3 per cent but lowering the bottom to 0.5 per cent. Endless versions of a one-page statement were faxed back and forth between Don Drummond, a key assistant deputy minister, and the bank. The text was pretty much agreed, but there was an unceasing tinkering with the numbers. It soon became an infuriating negotiation because of Crow’s unwillingness to budge even a fraction of a percentage point.

  Still, as the relationship deteriorated behind the scenes, the pressure continued to mount to keep Crow on board. Doug Peters, a highly respected former chief economist with the TD Bank who had just been elected as a Liberal and was secretary of state for financial institutions, fiercely opposed Crow’s policies but nonetheless urged us to keep him on for fear that the dollar would tank if we did not. That rocked us. Meanwhile, most Bay Street analysts were outspoken in public about the need for Crow to stay. On December 2, when I held a tele vised meeting with a group of economists at the Conference Centre in Ottawa as part of my budget consultations, someone did an informal poll and announced, live on Newsworld, that the group favoured Crow’s reappointment by a margin of roughly four to one.

  I understood the argument for keeping Crow, yet I came to believe if we could find a credible alternative candidate to take the job, and agree on the inflation targets in a public declaration, the warnings of the market analysts might prove to be overdrawn. Even as my budget meeting with the economists took place, Dodge and Drummond were popping out to exchange faxes with the Bank of Canada. Increasingly, tho
ugh, Dodge was looking at Thiessen’s reaction rather than Crow’s. Eventually, Dodge asked me if he could sound Thiessen out about taking the top job. I said yes. Thiessen, who was very loyal to Crow, indicated that he would consider it if necessary, and he and Dodge were able to agree on an extension of the existing inflation formula.

  Finally, a meeting was arranged between me and Crow at my departmental office in Ottawa. I was determined to see, one last time, if I could reach a zone of comfort with him. The meeting went on for hours, with David Dodge waiting in Terrie’s office for word, and then Terrie waiting in David’s office. Crow was absolutely stuck on 2 per cent as the top of the range, with a target lower than that. In truth, I would have been willing to tinker further with the numbers to keep him on board. But in the end it was Crow’s absolute intransigence that disturbed me. My god, I thought, if we can’t agree on something like this in which our objectives are similar and we have no crisis in front of us, what’s going to happen when there is a crisis? As the meeting wore on, I found myself coming to the conclusion that this game was over. I asked him point-blank whether he was saying that he could not live with anything but his precise demands, and he said yes.

  “Well,” I replied, “if that’s the case, we’re not going to be able to work together and we might as well deal with that.”

  He asked me whether I was saying that I did not intend to re appoint him, and I said yes. He agreed that he would step down without comment from either of us to ensure that there was no unnecessary roiling of the markets. And for several years the agreement held. Privately, he may have vented a bit, but in public he comported himself just as he promised, as I did.

  The prime minister had been clear from the start that this was to be my decision, and so I arranged a meeting at his office to inform him of my intention. Like me, he had been critical of Crow’s policies in Opposition and uncomfortable with his prickly personality. Still, my impression was that he shared my initial view that it might be better for the government if Crow were reappointed. Certainly he had every reason to expect that I would come back to him with just such a recommendation. He was surprised and clearly somewhat unnerved by what I had to say. “That’s fine,” he said at the time, but he later told me he had trouble sleeping that night.

  The announcement to cabinet elicited a quite different reaction, the result of long-nurtured and deeply felt antagonism to Crow. Despite my confidence that the markets would accept Crow’s replacement so long as it was clear that the institution remained sound and independent, we were all nervous the day of the announcement. In the event, Gordon Thiessen handled himself with the public skill that we all came to admire, and did so, to my relief, both in his native English and in French — which turned out to be much better than we had been told. The dollar actually rose slightly on the news of his appointment.

  The choice of Gordon Thiessen turned out to be even more inspired than we understood at the time. His commitment to a sound monetary policy was no less adamant than Crow’s had been. But in the place of Crow’s astringent personality, we had a governor who blunted much of the criticism of the bank simply by his willingness to listen and his readiness to explain. He also proved to be a very effective and highly regarded voice for Canada on the world stage (though I have to say that every year at the World Bank/International Monetary Fund meetings in Washington, he would enthusiastically suggest a stroll back to the hotel, knowing I have no sense of direction, and, claiming to know the way, get us hopelessly lost). Seven years later, when Thiessen attended his last G7 meeting as head of the Bank of Canada in Prague, Alan Greenspan, one of the most respected central bankers of our generation, insisted on giving the farewell speech on behalf of his colleagues.

  CHAPTER NINE

  Three and a Half Months

  As important as the decision on the governor of the Bank of Canada was, it was only one of many that a new minister with a new budget looming would face in the first few weeks in office. Although in retrospect it is obvious that I was able to forge a strong positive relationship with the ministry, which proved crucial to my success at Finance, that was by no means certain at the outset. In Opposition, we had been very critical of the department’s repeated failure to meet its deficit targets. On the other hand, we came to power with a very different approach to the public service than the Conservatives, who were traditionally suspicious of bureaucrats. They had huge ministerial staffs, so that meetings with the department, I am told, were like those of rival clans ranged against each other across the table. In contrast, we had been forced by an election promise to trim ministerial staffs to the bone, so that we were necessarily more reliant on the public service. Not only did I appreciate David Dodge’s willingness to bring the leadership of the department to Windsor in the early days, but I also liked the fact that he made a point of including Terrie in departmental meetings — and later on Karl Littler, Ruth Thorkelson, and other members of my political staff — helping to build a relationship of trust.

  The basic mechanism for preparing our first budget, starting from scratch with a deadline just three and a half months away, were rolling meetings that went on for weeks, often late into the night and through the weekends. It was referred to as a CMO — pronounced “see-mo” — which stood for “Cohen, Minister and others,” a relic from the days of a deputy minister of finance from the early 1980s, Mickey Cohen. The meetings usually included me, Terrie, David Dodge, and an assortment of senior, and sometimes more junior, officials that changed according to the topic. My parliamentary secretary, David Walker, from Winnipeg, was a frequent participant. Some of the political staffers would also attend the meetings where they had some direct interest or responsibility. Karl Littler, for example, developed an expertise on taxes, while Ruth Thorkelson specialized in social policy. Michele Cadario attended on issues affecting Western Canada or where there were special caucus sensitivities.

  We also made a point of including our communications people because we believed that, given the difficult decisions we were about to make, understanding the public’s state of mind and speaking to it was not something to be done after we had shaped our policy. This was not just a political issue, it was also a democratic one. Remember, we were living in the shadow of the failed Meech Lake and Charlottetown accords, which had won broad support among the political elites in the country but had failed to rally the public or even earn their acquiescence. Meanwhile, Preston Manning, who led the Reform Party from just one seat to fifty-two in the 1993 election, correctly pointed out that although we discussed reducing the deficit in the Red Book, we had not created a public mandate for some of the difficult decisions it would require — far more difficult indeed than we had imagined before taking office and seeing the scale of the problem.

  These were the same issues that led me to bring Elly Alboim to the table. Elly was at Earnscliffe, a consulting firm that had been hired by the previous government to help with budget communications. Prior to this time I had not known Elly, who was a former CBC bureau chief on Parliament Hill, but we were lucky to have inherited him. He provided a penetrating intellect not only on issues of communications but also of policy substance. He had the knack of waiting in a meeting until everyone else had said their piece, then jumping in with an analysis that took the discussion in a very different direction. Sometimes, I’d try to get him to speak first, but it usually didn’t work.

  Eventually, Elly was joined at the table by David Herle, by that time one of his colleagues at Earnscliffe. David brought an important perspective as a Westerner and as a close observer of national public opinion. He has a shrewd and sensitive policy mind, which was very important to me. I think it was sometimes a frustration to David that I valued his policy advice more than the polling he conducted. He would respond that the research he did into public opinion was the basis for giving the advice that he did.

  The CMOs, which were generally held in the ministerial boardroom near my office, shattered some of the cautious traditions of the public serv
ice. I made it clear from the start that everyone was equal around the table. “When you come up here,” I told them, “everyone has the right to speak, and anyone can tell me or the deputy or anyone else where to get off.” It took a while for this to penetrate.

  I have a temper. And I warned everyone that I was going to “lose it” from time to time. But I said I wanted them to come right back at me. Of course, the first couple of meetings, this didn’t work at all. I’d raise hell and say, “That’s the worst idea I have ever heard,” and embarrassed departmental officials would sit around in dumbfounded silence.

  There were two incidents that broke that pattern and allowed the CMOs to become the no-holds-barred discussions they had to be if we were to succeed. The first was an occasion when Terrie was having trouble coming to terms with some numbers we were discussing, and I told her that she couldn’t count and to stop slowing us down if she couldn’t keep up. Well, she went up one side of me and down the other, fourteen ways to Sunday. You could see that everyone else in the room was stunned: “My god, how is he going to react?” Here was the minister of finance being taken apart by his executive assistant in front of the department. The next day, I brought a little abacus someone had given me and announced I had a presentation to make before the CMO began. “Terrie, in recognition of your difficulties with numbers, I want to present you with this abacus,” I said — and everyone laughed.