During the late 1950s, Canadian authorities
became concerned about a deterioration in Canada’s
international competitiveness, aggravated by its
strong dollar, which continued to be supported by
substantial capital inflows. After the investment
boom of the mid-1950s, economic activity had
slowed significantly, and the unemployment rate
more than doubled from 3.4 per cent in 1956 to
7.2 per cent in 1961. In this environment, the
government sought to ease policy in order to
support demand and reduce the economic slack in
the economy.
James Coyne, who became Governor of the
Bank of Canada on 1 January 1955, focused
monetary policy on avoiding excessive domestic
demand, keeping inflation in check, and reducing
Canada’s reliance on foreign savings.
In favour of
“sound” money, he was convinced that
to engage in further large over-all monetary
expansion in an attempt to drive down interest rates
generally, with or without the motive of thereby
reducing the inflow of capital from abroad, is an
unsound and dangerous approach and would prove
to be an ineffective approach, to the problems of the
exchange rate, of the recession, and of achieving
more consistent economic growth (Bank of Canada
Annual Report 1960, 22).
Restrictive monetary policy at a time of
relatively high unemployment and low inflation led
to a sharp deterioration in relations between the
Return to a
Fixed Exchange Rate (1962-70)
Canada, 92 ½ cents,
Diefenbuck
“Political currency,” so-called because it satirizes a politician or a political party and
its policies, is private scrip that resembles a bank note but has no monetary value.
The “Diefenbuck” was the result of the devaluation of the Canadian dollar
against its U.S. counterpart during the 1960s that resulted from certain policies
implemented under the administration of Prime Minister John Diefenbaker.
Bank and the academic community.80 In late 1960,
twenty-nine prominent Canadian economists signed
a letter calling for the dismissal of Governor
Coyne.81 At the same time, relations with the
Diefenbaker government were also deteriorating.
Determined to pursue an expansionary policy, the
government did not believe that it had the support
of the Governor.82 The situation worsened when
the government objected to the size of the
Governor’s pension, which had been agreed upon
by the Bank’s Board of Directors. The dispute,
which became increasingly acrimonious and personal, came to a head on 30 May 1961, with the
government requesting the resignation of Governor
Coyne. The Governor refused. On 20 June, the
minister of finance introduced an expansionary
budget and announced that the government would
take steps to lower the value of the Canadian dollar,
including, as necessary, purchasing substantial
amounts of U.S. dollars in the exchange market
(Fleming 1961a). The government also introduced
a bill in Parliament (An Act Respecting the Bank
of Canada) to declare the position of Governor
vacant (House of Commons 1961). The bill passed
the House of Commons on 7 July, but after testimony
by Governor Coyne, the Senate Standing
Committee on Banking and Commerce concluded
on 12 July that there had been no misconduct on
A History of the Canadian Dollar 67
80. A 12 May 1962 article in The Economist, entitled “Inquest on a Floating Exchange Rate,” opined that while a floating exchange rate arguably served
Canada well in the period 1950–57, it was less clear thereafter because “domestic monetary policy itself began in these years to follow a perverse road.”
With interest rates remaining very high, the rate “ceased to behave in an anti-cyclical manner, and by its continuing buoyancy, did in fact exacerbate
both the domestic problem of under-employment and the long-term problem of a yawning trade deficit.”
81. See Gordon (1961).
82. The controversy over Coyne’s policies provided the impetus for Robert Mundell’s seminal work entitled, “The Appropriate Use of Monetary and Fiscal
Policy for Internal and External Stability” (Mundell 1962).
Image protected by copyright
68 A History of the Canadian Dollar
his part. The following day, the full Senate
confirmed the Committee’s findings. Governor
Coyne then resigned, viewing the decision of
the Senate as a vindication of his conduct.
Louis Rasminsky succeeded Coyne as Governor on
24 July 1961.83
Not surprisingly, the Canadian dollar began
to weaken in this environment. From a level of
about US$1.01 prior to the June budget statement,
the dollar quickly fell to US$0.97. It weakened
further in October 1961 to under US$0.96,
following an announcement by the minister of
finance that the appropriate discount of the
Canadian dollar against the U.S. dollar “might well
turn out to be greater than the present 3 per cent”
(Fleming 1961b).
The introduction of a “managed” flexible
exchange rate regime, under which the government
would intervene to keep the Canadian dollar at a
significant discount to its U.S. counterpart, as
opposed to just smoothing fluctuations, was in
some ways a compromise with the IMF. The Fund
was encouraging Canadian authorities to return to
a fixed exchange rate regime within the context of
the Bretton Woods system. No new par value for
the Canadian dollar was recommended, however.
Additional time was seen as necessary to prepare
for the re-establishment of a fixed rate.
After stabilizing at about US$0.95 between
November 1961 and March 1962, the Canadian
dollar began to weaken further, despite significant
intervention by the Bank of Canada on behalf of
the government to support the currency. On 2 May
1962, the government, in agreement with the
IMF, established a new par value for the Canadian
dollar, fixing it at US$0.9250 with a fluctuation band
of ±1 per cent.
A press statement released by the Office of
the Minister of Finance, Donald Fleming, stated
that although a floating exchange rate had its
advantages
the Government has concluded that it would be
desirable to give those engaged in international
transactions firm assurance of stability with regard to
the exchange rate . . . . The new rate of 92½ has
been established after careful assessment of all the
factors involved including the attitudes in the foreign
exchange market and the nature of the exchange
transactions which have been taking place in recent
months.84
Fixing the exchange rate at a markedly
lower level did not, however, relieve the pressure
on the Canadian dollar. Doubts remained about the
viability of the new rate, particularly given the
prevailing political uncertainty.85 Heavy official
intervention was therefore required to hold the
Canadian dollar within its allowed fluctuation band.
83. See Bélanger (1970) for a review of events.
84. It has been reported that Fleming wanted assurances that the dollar would not drop below US$0.90 if it were to float freely. Naturally, officials could
not give this assurance, despite their belief that an equilibrium rate was well above that level. The US$0.9250 rate at which the Canadian dollar was
fixed was apparently chosen by virtue of it being halfway between US$0.95 and US$0.90 (Helliwell 2005–06).
85. On 18 June 1962, a minority Conservative government was elected.
On 24 June 1962, the government
announced a major economic and financial program
aimed at restoring confidence in the Canadian dollar
and indicated its determination to defend the
currency’s new par value. Measures taken included
a tightening of fiscal and monetary policy, the
imposition of temporary import surcharges, and the
marshalling of US$1,050 million in financial
support from the international community. This
support consisted of a US$300 million drawing
from the IMF,86 a US$400 million line of credit
from the U.S. Export-Import Bank, US$250 million
under a reciprocal swap facility between the Bank
of Canada and the Federal Reserve Bank of
New York, and US$100 million from the Bank
of England under a similar arrangement.87
Other European central banks were also willing
to provide additional assistance, if necessary
(Bank of Canada Annual Report 1962, 8).
This program restored confidence in the
Canadian dollar.
The resumption of private capital
inflows during the second half of 1962 enabled the
Canadian authorities to gradually ease the emergency
measures imposed earlier. Much of the international
financial assistance received, excluding that of the
IMF, was repaid by the end of the year. Funds owed
to the IMF were fully repaid by 1964. For the
remainder of the decade, the Canadian dollar was
maintained, relatively easily for the most part, within
the permitted fluctuation band of ±1 per cent
around its US$0.9250 par value.
The dollar did, however, come under
significant, temporary downward pressure during
the summer of 1963, following the U.S. announcement
A History of the Canadian Dollar 69
86. A large proportion of the resources drawn from the IMF represented the liquidation of Canada’s “reserve position in the Fund,” which forms part of
Canada’s international reserves. Actual use of Fund credit amounted to US$138 million.
87. Through 1962, the Federal Reserve System entered into a series of reciprocal facilities with the central banks of most industrialized countries aimed at
providing mutual short-term financial assistance. The arrangement with the Bank of Canada was originally for US$250 million. Over time, it increased
and currently stands at US$2 billion. While most of these reciprocal facilities have been discontinued, the facility with the Bank of Canada is renewed
annually.
Image protected by copyright
70 A History of the Canadian Dollar
on 18 July that it would impose an “Interest
Equalization Tax” on foreign borrowings in U.S.
capital markets.88 Although Canada’s current
account deficit had narrowed significantly over the
previous two years, it was still large. Consequently,
there was a general fear that unless Canadian
interest rates rose by an offsetting amount (roughly
1 percentage point per year), capital inflows from
the United States would cease. On 31 July, the
United States agreed to exempt Canada from the
tax, with the proviso that Canada would not
increase its foreign international reserves through
the proceeds of borrowing in the United
States (Bank of Canada Annual Report 1963, 6).
Downward pressure on the currency ceased with
this agreement, and Canadian markets stabilized.
The Canadian dollar experienced another
bout of temporary downward pressure in March
1968, after the U.S. announcement of controls on
capital outflows. The pressure eased with an
agreement on 7 March that exempted Canada from
all such controls. Similar to the exemption from the
Interest Equalization Tax, Canada agreed that the
U.S. balance-of-payments position would not be
impaired as a result of its actions.
Because of concerns about the Bank of
Canada’s ability to conduct monetary policy in light
of these accords, there was a follow-up agreement
with the United States on 17 December 1968, which
stated that no particular level of reserves would
have to be targeted (Bank of Canada Annual Report
1968, 13). This made it easier for the Bank to
intervene in foreign exchange markets during
periods of upward pressure on the currency.