, m ( 1953 ) : “ the case for flexible exchange rates ”, in essays in positive economics, university of chicago press, chicago, pp 157 - 203. see, for example, “ a method of combining a free exchange rate with the present system of exchange control in canada ”, memorandum, 31 january 1949, bank of canada archives. domestic rate of inflation. canada had experienced a sharp escalation in consumer prices during the korean war, and inflationary pressures had persisted for some time after. while domestic spending had faltered in 1954, the subsequent recovery pushed inflation well above the level that the bank implicitly associated with price stability. coyne was convinced that the solution to both problems - low savings and high inflation - was a tighter monetary policy. higher interest rates would reduce domestic demand and help raise national savings. although a rudimentary money market had started to form in canada, with the active encouragement of the bank, it was not well developed. popular wisdom, in any case, suggested that traditional monetary policy mechanisms were unlikely to be effective, even when they involved tightening monetary policy. 10 as a result, coyne decided to combine reductions in the supply of bank reserves with healthy doses of moral suasion, much as his predecessor had done in earlier periods. the bank continued with this restrictive monetary policy stance through most of the late 1950s and into the early 1960s. in the face of rising unemployment and weakening economic activity, inflation dipped below 1 % by the spring of 1961. relations between the bank and the minister of finance had deteriorated sharply, and numerous government ministers had demanded a change in policy direction. however, any desire to remove james coyne and replace him with a more sympathetic governor ran up against the ambiguous nature of the legislation regarding the government ’ s powers vis - a - vis the bank. the academic community also became involved in the dispute and circulated a pamphlet entitled “ the economists versus the bank of canada ”. 11 a w phillips had just published his famous paper on unemployment and the growth of money wages in the united kingdom, and shown how higher ( wage ) inflation was typically associated with lower rates of unemployment. 12 not surprisingly, phillips ’ work found a receptive audience in canada, and researchers soon replicated his results with north american data. much of the commentary in the popular press during this period was also critical of the bank ’ s policies, and reflected the widespread view that a little more inflation was not such a bad thing - provided it could bring higher employment and stronger

on households is not to deny that businesses have also become more circumspect about debt as well. but corporate leverage did not really rise much in the preceding decade, at least outside a few celebrated instances. it was the change in household debt that was the defining feature of the period from the early 1990s to about 2008. bis central bankers ’ speeches the retail sector now faces different consumers. it is not actually that consumers have no income to spend, nor that their confidence levels are that low, nor that their saving rate is that high. measures of confidence that date back to the 1970s show it to be roughly at its long - run average. the household saving rate as measured by the australian statistician, at just over 10 per cent, is not, in fact, high in the broader sweep of history ( graph 4 ). graph 4 to be sure, confidence was persistently very high for years up to 2008, and saving was very low – even falling to about zero, as measured, at one point. but that period was unusual. i don ’ t think it will return. moreover consumers are much more knowledgeable about prices as a result of information technology, and have at their disposal ways of responding to that information that a decade or more ago they did not have. this is putting pressure on retail business models, on wholesaling and distribution, and also on segments of the retail property sector. given that the change to household behaviour was probably inevitable, the income boost from the terms of trade arrived at a rather fortuitous time. it helped to accommodate a rise in household saving and a slowdown in the build - up of debt in a fairly benign fashion. the weakness of some other parts of private demand, and openness to imports with a high exchange rate has also meant that a very large expansion in mining investment has been accommodated without overheating the economy overall. as it was, total real private final demand in australia rose by 6 per cent in 2011 / 12, well above trend. with the peak in the investment phase of the mining boom now coming into view, the question naturally arises as to how the balance between the various types of demand in the economy will unfold. mining investment will contribute less to growth in domestic demand in the current fiscal year than it did last year, and less again next year. working in the other direction, it is likely that export volume growth will begin to strengthen as the capacity being installed in the resource sector is used. that