inflationary impact of the inflows in Canada


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.

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