Conflict with the IMF
As a member of the International Monetary
Fund (IMF), Canada’s decision to float the
Canadian dollar was at odds with its commitment
to the Fund to maintain a fixed exchange rate within
the Bretton Woods system. In this regard, in 1949
the Canadian authorities had established with the
IMF a “par value” of US$0.9091 with a fluctuation
band of ±1 per cent. The decision was also taken
over the opposition of IMF staff who recommended more vigorous foreign exchange
intervention or the imposition of controls on capital inflows (IMF 1950).79 There were also concerns
that Canada had “gravely compromised and embarrassed”
the IMF and had set a bad example for
other “less responsible members” (Goforth 1950).
79. Given his close relationship with the IMF, the decision to float the Canadian dollar must have been difficult for Rasminsky. But since the economic
argument in favour of a float was sound, he supported the decision. He also recognized that the international economic environment was not what
had been expected. Unlike the 1930s, the predominant monetary issue of the day was inflation not deflation, and there had been no tendency towards
competitive devaluations (Muirhead 1999, 140).
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At least initially, floating was viewed as a
temporary measure. The minister of finance noted
the government’s intention to remain in consultation with the Fund and
ultimately to conform to the provisions of the Fund’s
Articles of Agreement which stipulate that member
countries should not allow their exchange rates to
fluctuate more than one percent on either side of the
par values from time to time established with the
Fund (Abbott 1950).
It would be almost 12 years before Canada
reintroduced a fixed exchange rate and was again
in the good graces of the IMF. Consequently,
Canada came to be viewed as something of
a maverick in international financial circles. The
unwillingness to re-fix the exchange rate appears to
have reflected concern about repeating the mistake
of 1946 when the dollar was revalued upwards only
to come under significant downward pressure the
next year, followed by a devaluation in 1949.
Subsequently, interest in re-pegging the currency
waned as it seemed that Canada had the best of all
worlds—a non-discriminatory trading system, an
open capital market, and a reasonably stable
exchange rate. While Canada’s actions were not
consistent with the IMF’s practices, the outcome
was certainly in line with its goals.
