The governor of the Bank of Canada, ears reddened by the biting November wind, is explaining the advantages of crossbreeding cattle. In that voice. He sounds a bit like Krusty the Clown-the embittered jester on TV's The Simpsons-a rasp inside a drawl, but without the self-absorption. It is captivating. "The Charolais give better meat, but the Herefords are a healthier animal. So, we like to cross-mix them. We've had good success," David Dodge says with the authority of a seasoned farmer. Long before he reached the pinnacle of economic policymaking in Ottawa-first as deputy finance minister between 1992 and 1997, and for the past two years as head of the central bank-Dodge was raising cattle on his farm west of the capital. He no longer can tend to the animals himself; fighting inflation is far too consuming a responsibility. But at least one weekend a month, Dodge is out here fixing a fence or the barn roof. He built the farmhouse himself 20 years ago. "David's a real handyman," says Dodge's wife, Chris. "And he loves it. You can see what you've done at the end of the day, whereas in policy it can take much longer-or forever."

It used to be that only Ottawa insiders heard the voice. But now that Dodge has moved from the backrooms into the governor's office, the Canadian public is rapidly getting used to its gravelly tone. Which is for the better, because what the Bank of Canada governor actually does-other than signing our paper currency and earning between $313,200 and $368,500 a year-is a mystery to most of us. We know it's got something to do with managing the money supply and jiggling interest rates to keep the economy on an even keel. But beyond that, the bank's modus operandi is as penetrable as the blueprints for a nuclear warhead. Dodge is the first governor to express a desire to make it more accessible.

That Dodge is by far the most public of the seven governors who have headed Canada's central bank since its creation in 1934 may be because he is also the only one since the first governor, Graham Towers, to come from outside the bank. It shows. He is transforming the institution-secretive, stuffy and doctrinaire, the financial-sector equivalent to Freemasonry-into a dynamic and increasingly open one. He is the first governor to grant an in-depth one-on-one interview-to Report on Business magazine-scrubbing an unwritten central-bank rule.

Dodge can explain the workings of monetary policy with a flair and clarity foreign to past governors, whose statements were obscure to the point of meaninglessness. Market watchers could never get a handle on whether the bank was leaning toward raising interest rates or chopping them, which often caused big surprises for investors who misread the bank's tea leaves.

The current governor, 59, is as direct as a central bank boss can be. " Obviously, because what one says can move markets in a rather different way than what one says as deputy minister, I have to be a little bit more cautious-no, that's not the right word-I have to be a little bit more precise in the wording that I use. Here I do speak for the bankI do make policy. The buck stops here, whereas for a deputy minister the buck stops with the minister or Prime Minister."

Market players find Dodge's more open style refreshing. Only once has the market blamed him for sending out mixed signals- on Sept. 4, when the bank left rates unchanged despite Dodge's repeated pronouncements about the need to "reduce monetary stimulus" (translation: raise interest rates). But " that's not typical of what's been happening under Dodge," says Toronto Dominion Bank senior economist Marc Levesque. "He has done a good job of giving us a good idea of how the bank is thinking."

Well before he took the helm at the Bank of Canada, Dodge's thinking was coveted in Ottawa. He piloted the Mulroney government's controversial introduction of the GST. By the time he became Paul Martin's deputy and the architect of Ottawa's deficit reduction strategy, Dodge was easily the most powerful and respected bureaucrat in the capital. Which is why, as central bank governor, he can wade into policy debates-subtly touting closer Canada-U.S. integration, admonishing politicians to keep the faith of fiscal restraint-that go well beyond the realm of monetary policy. No previous governor dared so much.

Dodge is winning kudos for more than his candour. His stickhandling post-Sept. 11 helped spare Canada from recession. The one fly in the ointment is the dollar. Big fly. The currency hit a record low of 61.75 cents (U.S.) a year ago. It has stabilized since then, but remains vulnerable. Should Canadians switch en masse to the U.S. dollar for all their business dealings, or Ottawa finally throw in the towel and adopt the greenback, Dodge will find himself out of a job. It would be an inglorious legacy.

Yet Dodge might not see it that way. In October, he told the Commons finance committee that Canada should take free trade with the U.S. to the next level. Although he didn't say it, the logical outcome of that process would be a currency union-and no Canadian central bank. Dodge doesn't duck the issue. "An economist will always tell you that tearing down barriers between markets will promote efficiency, and as an economist I certainly have that view," he says.

The Canbuck's fate may be the biggest economic challenge facing the country this decade. It will also define Dodge's seven-year term, which expires in 2008. It has made following the central a popular pastime on Bay Street. Which raises an interesting question: "Is it a coincidence that David Dodge turns up in all the hot files?" asks a senior central-bank watcher. "I mean, does he turn up because it's hot, or does he make it hot?"

Dressed in worn khakis, a canvas jacket and his favourite Irish tweed cap, Dodge might be unrecognizable in his farmer guise were it not for the pipe in his hand. It's a fixture. "David can't be outside for three minutes without loading up on that damn pipe," jokes Paul Martin, who says the "only time David ever got me in trouble" was when TV cameras caught the then-finance minister and his pipe-toting deputy together. "I got more letters chewing me out for walking down the street with a smoker."

A non-smoking bylaw in the capital means Dodge can often be seen ambling alongside the bank's Wellington Street headquarters, raising his pipe to salute friends and neighbourhood regulars. Despite his position, Dodge is informal and disarmingly warm. "David will greet friends with this big bear hug. He has this knack for making people feel that they matter," says Wendy Dobson, a former Finance Department colleague. Friends such as Dobson insist neither the rigours nor the status of being governor has changed him. Except for the suits. He finally wears them, impeccable ones at that. "I have noticed he is looking more like a central banker these days," she says.

The pre-bank Dodge, a rumpled academic to the core, was among the most sartorially challenged bureaucrats in the capital. Finance cohorts remember their deputy showing up for work in holey shirts. "There was never any pressure for us to spend money on clothes because, with David around, it was very easy not to be the worst-dressed in the department," recalls a former subordinate. The old wardrobe points more to frugality than slobdom. After all, as DM, Dodge only replaced the wobbly relic of a couch in his office when colleagues warned that the department could be liable if a high-powered visitor was injured in a collapse. Then there was the equally unsound Chevy Lumina that Dodge drove, luxurious car allowance notwithstanding. When the expense accounts of top civil servants were made public a few years back, Dodge emerged as the most frugal by far, spending less than $100 in a year.

Tightfistedness is what you'd expect from someone born into Protestant upper-middle-class Toronto in wartime. The Dodges, who trace their roots to the English-Welsh border, moved to Yonge and Eglinton in the early 1900s from the Annapolis Valley in Nova Scotia. (Another branch of the family founded a certain car company in the U.S.) The Toronto Dodges were upright people. David Dodge's father, a onetime member of Canada's national cricket team and a manufacturer of waxes and dyes, married late in life; David was an only, but unspoiled, child. His father rarely indulged him and, when he did, it was earned. Young David was treated to an annual father-son lunch in the Toronto Board of Trade dining room, but only if his grades met dad's high expectations. They always did.

Dodge started out as a math and chemistry major at Queen's University in the early '60s, but soon switched to economics. "It was an exciting time," Dodge says, recalling class debates about the 1961 Coyne Affair, when Prime Minister John Diefenbaker was at loggerheads with Bank of Canada governor James Coyne over monetary policy. The incident, which led to Coyne's resignation, clarified the reality facing all subsequent governors-that while nominally independent of the government, no central bank governor can last long without its support.

Dodge had no aspirations then to head the central bank. He was keener on labour economics and the blond, German-born Montrealer who kept popping up in his classes. Christiane Schweiger was a rarity in 1961-a female student in the male-dominated field of economics. Dodge was smitten, but circumstances postponed their romance; he won a scholarship to do a doctorate at Princeton University, and she went travelling in Europe. They finally married in 1967.

Settling in Kingston, Dodge appeared destined for a cushy life in academe as a Queen's professor. The couple's two daughters were born there, Janine in 1970, and Alexa a year later. In 1972, the family moved to Ottawa for what was supposed to be a two-year stint for Dodge in the Finance Department. " Once we got to Ottawa, David was very interested in doing the best he could for Canada. There was a strong streak of patriotism in his decision to stay," says Chris.

In 1976, Dodge became the director of research at the Anti-Inflation Board, the agency created by Pierre Trudeau to implement wage and price controls. It seems like an oddly interventionist job for a classically leaning (i.e. free-market) economist like Dodge. It may explain why Dodge left the civil service in the late 1970s for a job at the Institute for Research on Public Policy, where he became an early advocate of Canada-U.S. free trade. But he soon returned to the bureaucracy, this time to a job that fanned his true passion, labour-market economics, at the Department of Employment and Immigration.

At E&I, Dodge quickly developed a reputation for candour, a trait that occasionally landed him in hot water. In 1982, he warned that 250,000 jobs lost in the 1980-'81 recession were gone forever and criticized the government's job-creation schemes. It was hardly a simpatico message for a Trudeau government desperate to stave off electoral extermination. But privately no one questioned Dodge's analysis. And in 1984, Trudeau promoted him to assistant deputy minister of fiscal policy in the Finance Department, making him a key player in the budget process. The Liberals' defeat that year meant Dodge's money-saving ideas, including a proposal to stop indexing baby-bonus and old-age security benefits to inflation, were left to Brian Mulroney's Tories to implement. Seniors protested on Parliament Hill over the partial deindexation of their benefits; the miserable optics of penalizing the elderly forced Finance Minister Michael Wilson to retreat.

Dodge, though, was unscathed. Wilson promoted him in 1986 to head the department's tax policy branch, putting him in charge of a massive overhaul of the federal income- and sales-tax systems. The focal point of the reform-the goods and services tax-poisoned public sentiment toward the Tories. But Dodge, along with his next-in-command, Michael Sabia (now CEO of Globe and Mail parent BCE Inc.), believed deeply in the rightness of the tax, which replaced a much higher sales tax on manufacturers that hurt Canadian exports. Frustrated by opposition attempts to stall the GST, Dodge strode into the political fray by telling MPs the government intended to push through the tax "in military fashion." He was roundly criticized for the outburst, a glaring breach of civil-servant etiquette.

Again, though, Dodge's straight talk earned him a promotion, this time as Canada's ambassador to the G-7 Summit between 1990 and 1992. When then-deputy finance minister Fred Gorbet announced his departure in mid-1992, Dodge was a shoo-in as his replacement. "I recommended him very strongly," says Gorbet. "I thought he was one of the brightest civil servants of our generation. He was focused, direct and a good leader. There was no bullshit with him."

When Dodge moved into the deputy minister's office, he hung a plaque on his door. It read: "Due to current financial constraints, the light at the end of the tunnel will remain off until further notice." It set the tone for his five years in the post-a period of deep, deep budget cuts. When the Liberals came to power in 1993, Dodge intervened to get a reluctant Paul Martin, who coveted the Industry portfolio, to instead take over at Finance. The Tories had abandoned their credo of fiscal restraint; the deficit hit a record $42 billion by the time they were voted out of office. Dodge needed an MP of Martin's stature to get the government back on fiscal track, first of all by reneging on the Liberals' promise to kill the GST.

But the Martin-Dodge tag team was volatile. "Both of us felt the best ideas came out of a huge cauldron of enraged debate," recalls Martin. The minister chewed out underlings who were too timid to talk back. Dodge didn't have that problem. When he thought his minister had it wrong, Dodge simply interrupted Martin with a terse "Horseshit!" "There were hundreds of 'horseshit' meetings," says a former department staffer. "But when the abuse was flying from the ministerial side, David just put up his shield. He used to say: 'I don't care if they fire me. Until they do, I've got things to accomplish here.'"

In January, 1995, The Wall Street Journal published an editorial entitled " Bankrupt Canada?" Following on the heels of the Mexican peso crisis, the paper warned that "Mexico isn't the only U.S. neighbour flirting with the financial abyss." The Canadian dollar sank precipitously over the next few days until Dodge received a call from central-bank governor Gordon Thiessen informing him of an imminent 100-basis-point (1%) hike in the bank rate. The increase, coming all at once, was gigantic. That it had come to this crystallized for Dodge Canada's fundamental problem: a total lack of co-ordination of monetary and fiscal policy. As long as Ottawa's books were so deeply in the red, the Bank of Canada would need to keep interest rates inordinately high to lure capital into Canadian investments. Otherwise, the dollar risked becoming a northern peso.

The peso crisis was the final catalyst in Canada's transformation from financial basket case into international role model. The February, 1995, budget, Dodge's main legacy as DM, was a watershed. For starters, it announced spending cuts of $25 billion over three years, a reduction in transfers to the provinces of $7 billion and the elimination of 45,000 civil-service jobs. Selling the tough medicine to Canadians was hard enough. Even more resistance came from within the bureaucracy. Chris Dodge remembers the period as "extraordinarily stressful. But David was tenacious. He wanted to see things through." Through it all, colleagues say Dodge retained his good humour. But by 1997, as the federal government prepared to balance the budget for the first time in more than two decades, friends worried about Dodge's health. He admits he was exhausted. "Well, I had done my five years [at Finance]. And at five years, you run out of gas."

To decompress, Dodge and his wife, herself a senior civil servant at the Treasury Board, took a yearlong sabbatical in Vancouver. Dodge studied health economics and taught at the University of British Columbia; Chris indulged a long-time dream of studying art, enrolling at the Emily Carr Institute. "One of the reasons for going to Vancouver was to be reminded in a tangible way what normal life is like," says Chris. There is no blending into the background for mandarins in Ottawa-the town's too small for that.

Dodge came back determined to make a permanent change, but was persuaded by the Prime Minister's Office to become deputy health minister. Dodge figured he could do four years "and then go back to teaching."

He encountered at Health an internal culture at odds with the monastic-like order of Finance. He had plans to reform medicare, which, in an ironic twist not lost on his critics, had been suffering from the budget cuts Dodge himself inflicted as finance deputy. Instead, he found himself in the throes of internecine warfare. Dodge was forced to discipline scientists at the Health Protection Branch who complained about being muzzled. "That's all bullshit. Scientists have not been suppressed," Dodge shot back to a reporter at the time. It was clear he was not enjoying himself. He did manage to secure a substantial reinvestment in health transfers to the provinces in the 1999 budget. But he came to realize that what the department needed was not a policy guy, but an administrator. It became well known that Dodge wanted a change.

Early in 2000, Gordon Thiessen told Paul Martin he would step down as central bank governor the following January. Three names made the shortlist for successor: Malcolm Knight, the bank's deputy governor; John McCallum, then chief economist at Royal Bank (now federal Defence Minister); and Dodge. The search committee was afraid Dodge was too much of a blabber for such a hypersensitive post. Then there was the question of whether the bank's independence would be compromised by a governor with such intimate contacts on the Hill. Purists feared Dodge would be seen internationally as Paul Martin's puppet, undermining confidence in Canada's monetary policy. Ultimately, the choice of a new governor fell to Martin, who was unswayed by such concerns. After all, he'd seen firsthand that Dodge was no toady.

Dodge took over at the bank on Feb. 1, 2001. Three weeks into the job, in his first public speech at the same Toronto Board of Trade he visited as a schoolboy, Dodge stunned many with his cool, casual style. Nortel Networks was crashing and DaimlerChrysler had just resorted to big layoffs. Recession was on everyone's lips. Not Dodge's. "In the rest of the economy, incomes are high, employment is high and demand is strong. So, what's the worry?" he said to reporters.

One of Dodge's earliest policy moves was to extend a formal agreement between the bank and the Finance Department on inflation targets. Inflation had been the bank's preoccupation since John Crow persuaded the government to formalize the targets in 1991. Crow had been squeezed out of the job in 1993 when he pushed for lower targets; Martin appointed Thiessen to the post
with a stated goal of keeping inflation between 1% and 3%. (The agreement is not seen as a threat to the bank's independence, since the bank alone decides how to achieve the target.)

In mid-2001, Dodge and Martin renewed the inflation-target agreement until 2006. More important, Dodge explicitly stated that he would aim for the midpoint of the target range, 2%. Bank watchers say the move signalled a major shift. The bank's previous orthodoxy meant erring on the side of caution-pushing for the lower end of the range. The difference is not as minor as it sounds. Tolerating a slightly higher rate of inflation can translate into billions of dollars in additional economic activity and higher employment. "If Dodge hadn't been there, it would have been 1.5% rather than 2%," says Universite du Quebec a Montreal economist Pierre Fortin, a staunch critic of the central bank in recent years.

"At the last renewal in 2001, we actually had a lot more evidence on which to operate than we had when we went into the game in 1991," says Dodge. "Our [research] guys beat their heads against the wall and we couldn't find any compelling argument that 2.5% or 1.5% was any better than 2%. Given that [the market's] inflation expectations were very well anchored at 2%, there is no compelling reason to move it."

On Sept. 11, 2001, when the foundations of the world economy were shaken by the collapsing World Trade Center towers, the first thing Paul Martin did was call his deputy, Kevin Lynch. "Where's David?" he demanded. To prevent a post-attack spiral into a recession, the central bank would need to act swiftly. But Dodge was on a plane over Europe, returning from one of the bimonthly secret meetings the world's main central bankers hold in Basel, Switzerland. Back in Ottawa, over the next three months, Dodge slashed interest rates repeatedly: 50 basis points in September, 75 basis points in October, another 50 the following month and a further 25 in January. By the end of Dodge's first year as governor, he had razed the bank's key overnight lending rate to 2%, its lowest level in 40 years.

The cuts achieved their main objective: keeping Canada's economy above water. Indeed, the results were spectacular: Canada's annual rate of economic growth hit 5.1% in the first half of 2002. But there was a serious casualty: Investors dropped the Canadian dollar in droves, saddling the Chretien government with a full-blown currency crisis. Martin and Dodge scrambled to New York in January to reassure Wall Street about the strength of the Canadian economy. By April, Dodge felt compelled to abandon his official neutrality on the value of the currency with an unprecedented statement denouncing the market's failing confidence in the dollar as "not helpful." It was the central bank's equivalent of heavy artillery.

Some bank watchers see Dodge's subsequent increase in the key rate to 2.75% and recent talk of further tightening as an attempt to put a floor under the dollar. "Any significant decline of the Canadian dollar from last year's levels would raise existential questions about the currency that the bank would rather avoid," says CIBC World Markets chief economist Jeff Rubin. Dodge does not comment directly on the dollar, but denies Rubin's claim this way: "We have an extraordinarily clear mandate: Keep inflation between 1% and 3%. The best contribution monetary policy can make is to maintain confidence in the value of money and have expectations about inflation well anchored. The best way to do that is to target the [inflation] goal."

Rubin, unlike most bank watchers, doesn't buy it. Dodge's "official line never changes, but actions speak louder than words," Rubin says. He thinks Dodge has moved to restore the historic gap between Canadian and U.S. interest rates in a bid to buttress the currency. In recent years, Canadian rates hovered below U.S. rates. But subsequent reductions by the U.S. Federal Reserve Board and tightening by Dodge have increased the differential in favour of Canada to 150 basis points. That is a powerful incentive for foreign investors to hold Canadian-dollar investments. "It's not the official verbiage from the Bank of Canada that is going to do the heavy lifting for the Canadian dollar. It's the interest-rate differential," Rubin says. "The real reason for the increase is to support the currency. The inflation threat is not credible."

It's late November and the Dodges are officially homeless. They've just moved out of their yuppie Echo Drive condo, but the modest home-by New Edinburgh standards-they've just bought for $425,000 isn't ready yet. They're renovating, in part to install a studio for Chris, who has retired from the civil service. Until the house is ready, the governor of the Bank of Canada and his wife are crashing at a friend's place. Why pay those ridiculous Ottawa hotel rates?

Occasionally, however, Dodge actually does splurge. For many years, he and Chris have hosted one of the capital's biggest blow-outs: their biannual Oysters & Black Velvet Boxing Day party. The Dodges fork out for enough mollusks, Guinness and champagne (the latter two mixed to produce the infamous Black Velvet) to satisfy as many as 150 invitees. But it's really the hosts' generosity of spirit that draws the crowd. On that front, Dodge may be the last of the big spenders.

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