I've been spending much of the day thinking about the Coyne Affair. You may well ask what the Coyne Affair is; it seems to be one of the few things for which there is no convenient Wikipedia entry to which I can direct you. The Coyne Affair refers to James Coyne, who was Governor of the Bank of Canada from 1955 to 1961. To make a long story short, the government thought that his monetary policy stance was needlessly tight, and the conflict was ended – if not resolved – by Governor Coyne's resignation. For the most part, if Canadian economists ever think about the episode, it is invariably in terms of how it clarified just who was responsible for monetary policy. Although the Governor and the Bank are responsible for the day-to-day handling of monetary policy, the Minister of Finance will prevail in a serious conflict with the Governor.

But today, the Bank of Canada's Larry Schembri visited Laval to present a paper on the topic, and I learned that there's much more to the story than that. For example, there's the question of whether or not Coyne should have won the argument. When the heavy artillery of modern theory and econometrics is brought to bear on the subject, it seems pretty clear that Coyne should have lost the argument: his policies were indeed needlessly tight.

That is of course a conclusion made with the benefit of all the hindsight that the authors can muster, and Pierre Siklos mounts a partial defense of Coyne here, making the point that the data available to Coyne at the time were not those available to us now, and that they paint a somewhat more nuanced picture. But then again, neither do they vindicate him. As Pierre puts it,

The empirical evidence presented here is suggestive of the possible overreaction of the Bank of Canada to inflationary developments. Whether the estimates are conclusive is another matter, as the combined narrative and econometric evidence is not entirely clear concerning the extent to which the Governor, in particular, wanted to pre-empt or eliminate inflationary pressures in the Canadian economy. Therefore, paraphrasing the wonderful expression used in Scottish Courts for the situation where the prosecution did not provide sufficient evidence of guilt, but where there are considerable doubts about the offender’s innocence, the verdict on the Coyne Affair is ‘not proven’.

In retrospect, the Bank of Canada had adopted the wrong policy stance, even if there was a case for believing that it was a good idea at the time. But that doesn't necessarily mean that the policy implemented after Coyne's departure was an improvement. It should be remembered that the context in which Coyne was operating was one that no-one had seen before: almost alone among the Bretton Woods countries, Canada had abandoned the fixed exchange rate and let the CAD float in 1950. Worse, Robert Mundell had yet to write the papers that would become the guide for open-economy monetary policy.

So when it had been decided – for good or for ill – that Coyne had mishandled monetary policy, the next question was what to do instead. The answer they came up with was to go back to the familiar workings of a fixed exchange rate. This turned out to be an even worse move than continuing Coyne's policies, and the Bank ended up playing policy whack-a-mole for a decade, trying to deal with various manifestations of an unsustainable policy before finally giving up in 1970.

And this is the lesson for today. Yes, many governments and monetary authorities have made significant mistakes over the past decade or so. But that doesn't mean that alternatives produced in great haste and at the last minute will be an improvement.