In this environment, Canadian authorities
became increasingly concerned about the
inflationary impact of the inflows if Canada tried
to maintain a fixed exchange rate. There was also
concern that the inflows were leading to a
“substantial and involuntary increase in Canada’s
gross foreign debt” (FECB 1950, 14).
On 30 September 1950, Douglas Abbott,
the Minister of Finance, announced that
Today the Government, by Order in Council under
the authority of the Foreign Exchange Control Act,
cancelled the official rates of exchange which had
been in effect since September 19th of last year ....
It has been decided not to establish any new fixed
parity for the Canadian dollar at this time, nor to
prescribe any new official fixed rates of exchange.
Instead, rates of exchange will be determined by
conditions of supply and demand for foreign currencies in Canada.
He also announced that any remaining
import prohibitions and quota restrictions, imposed
in November 1947, would be eliminated, effective
Poster for Canada Savings Bond campaign,
ca. 1950
62 A History of the Canadian Dollar
2 January 1951. Controls on imports of capital
goods were also to be reviewed.
Interestingly, the idea of floating the
Canadian dollar was widely discussed as early as the
beginning of 1949. A then-secret memorandum
prepared in January of that year by James Coyne,
then Deputy Governor of the Bank of Canada,
made the case for floating the currency while
retaining exchange controls. In his paper, Coyne
noted that it would be better to “have a natural rate
which could move up or down from time to time
as economic conditions might require.” He also
noted that government inertia made it very difficult
for the authorities to adjust a fixed exchange rate
in a timely manner (Coyne 1949).
Options other than floating the exchange
rate were apparently dismissed as impractical,
including revaluing the Canadian dollar upwards,
widening the currency’s permitted ±1 per cent
fluctuation band, or restricting capital inflows.
Given the criticism levelled against the government
after the 1946 revaluation of the Canadian dollar,
followed by the short-lived 1949 devaluation,
another revaluation was viewed as unacceptable. It
was also unclear how much of a revaluation
would be required to stem the capital inflows.
Widening the bands also posed problems, since it
was unclear how wide the bands would have to be.
Likewise, restrictions on capital inflows were seen
as untenable from a longer-term perspective
for a country dependent on foreign capital
(Hexner 1954, 248).
This view is consistent with a speech on exchange
controls given by Douglas Abbott, Minister of
Finance, in December 1951,
The conclusion I have come to is that we would be
better advised not to rely on exchange restrictions,
but rather on the general handling of our domestic
economic situation to keep us in reasonable balance
with the outside world and to maintain the Canadian
dollar over the years at an appropriate relationship
with foreign currencies.
Bank of Canada, $10, 1954 series
This was the first note series to feature Canadian landscapes.
These notes were simpler in design and more modern in style. This
was also the only series to feature the reigning monarch on each
denomination. This was popularly known as the “devil’s head”
series because of the image discernible in the Queen’s hair.
A History of the Canadian Dollar 63
The system envisaged by Coyne in 1949 of
a floating Canadian dollar within a system of
foreign exchange controls was put into practice
when markets opened on 2 October 1950. With
interbank trading now permitted, the Canadian
dollar quickly appreciated, rising five cents to
roughly US$0.95.
With the floating of the Canadian dollar,
the rationale for the continuation of exchange controls came into question. Through 1951, controls
were progressively eased. Finally, on 14 December
1951, the Foreign Exchange Control Regulations
were revoked by an Order-in-Council. New regulations were passed that exempted all persons and all
transactions from the need for permits to buy and
sell foreign exchange. The Foreign Exchange
Control Act itself, which had been renewed for
another two-year period earlier in 1951, was
repealed in October 1952.
After a quick rise to the US$0.95 level
immediately after the float (Chart 5), the Canadian
dollar continued to appreciate at a more gentle pace,
moving to a small premium of about 2 per cent
vis-à-vis the U.S. dollar by 1952. From then
until the end of 1960, it traded in a relatively
narrow range between US$1.02 and US$1.06. The
peak for the Canadian dollar during this period
was US$1.0614, touched on 20 August 1957.
Foreign exchange intervention by the Bank of
Canada through the Exchange Fund Account was
limited to smoothing short-run fluctuations of the
Canadian dollar.
While generally unpopular in business
circles, the floating exchange rate was supported by
many academic economists as a means of insulating
the domestic economy from external shocks, either
inflationary or deflationary.78 It was also recognized
78. A fixed exchange rate required the Bank of Canada to direct monetary policy to maintaining the fixed rate. As a consequence, it could not pursue an
independent monetary policy. Rather, it had to closely follow changes in U.S. interest rates, regardless of whether those interest rate changes were
appropriate to Canadian circumstances. In contrast, a floating exchange rate gave the Bank of Canada the scope to direct policy at achieving and
maintaining domestic price stability.
Chart 5
Canadian Dollar in Terms of the U.S. Dollar
Monthly averages (1950–62)
* 20 August 1957: Modern-day Canadian-dollar peak: US$1.0614
1. September 1950: Canadian dollar floated
2. December 1951: Exchange controls lifted
3. May 1962: Canadian dollar fixed
Source: Bank of Canada; U.S. Federal Reserve System (1976)
64 A History of the Canadian Dollar
that the two-way risk associated with a flexible
exchange rate could itself lessen large capital
movements (Hexner 1954, 253).
Canada’s successful experiment with a
flexible exchange rate regime through much of the
1950s inspired considerable early academic work on
the merits of a flexible exchange rate system. Later,
it would provide a model for the rest of the world
when the Bretton Woods system of fixed exchange
rates finally collapsed during the early 1970s
reference :
https://www.bankofcanada.ca/wp-content/uploads/2010/07/dollar_book.pdf
