The dollar in the 1970s
Immediately following the government’s
announcement that it would allow the Canadian
dollar to float, the currency appreciated sharply,
rising roughly 5 per cent to about US$0.97. It
continued to drift upwards through the autumn of
1970 and into 1971 to trade in a relatively narrow
range between US$0.98 and US$0.99. By 1972, the
Canadian dollar had traded through parity with its
U.S. counterpart. It reached a high of US$1.0443
on 25 April 1974.
The strength of the Canadian dollar
through this period can largely be attributed to
strong global demand, which boosted the prices of
raw materials. There were also large inflows of
foreign capital, partly reflecting the view that
Canada’s balance of payments was expected to be
less affected by the tripling of oil prices that
occurred through 1973 than that of other major
industrial countries, since it was only a small net
importer of oil.
During the early 1970s, the dollar’s strength
was also due to the general weakness of the U.S.
currency against all major currencies as the Bretton
Woods system of fixed exchange rates collapsed.
With the U.S. balance-of-payments deficit widening
to unprecedented levels, the U.S. government
suspended the U.S. dollar’s convertibility into gold
on 15 August 1971 and imposed a 10 per cent
surcharge on eligible imports. This action followed
a series of revaluations of major currencies. On
18 December 1971, the major industrial countries
agreed (the Smithsonian Agreement) to a new
pattern of parities for the major currencies
(excluding the Canadian dollar) with a fluctuation
band of ±2.25 per cent. The U.S. dollar was also
A History of the Canadian Dollar 73
devalued by 8.57 per cent against gold, although it
remained inconvertible.
This last-ditch attempt to
save the Bretton Woods system failed. By 1973,
all major currencies were floating against the
U.S. dollar.
The strength of the Canadian dollar against
its U.S. counterpart during this period concerned
the authorities, who feared the impact of a higher
dollar on Canada’s export industries at a time of
relatively high unemployment. Various measures to
rectify the problem were examined but dismissed
as being either unworkable or harmful. These
included the introduction of a dual exchange rate
system, the use of moral suasion on the banks to
limit the run-down of their foreign currency assets,
and government control of the sale of new issues
of Canadian securities to non-residents. None of
these options was ever pursued (Government of
Canada 1972). However, under the Winnipeg
Agreement, reached on 12 June 1972,
chartered
banks agreed, with the concurrence of the minister
of finance, to an interest rate ceiling on large,
short-term (less than one year) deposits. The
purpose of the agreement was to reduce “the
process of escalation of Canadian short-term
interest rates” (Bank of Canada Annual Report
1972, 15). Lower Canadian short-term interest rates
and narrower rate differentials with the United
States helped to relieve some of the upward
pressure on the Canadian dollar.
74 A History of the Canadian Dollar
Introduction of monetary targets
In reaction to “stagflation,” the combination of
high unemployment and inflation that prevailed
during the early 1970s, most major economies,
including Canada, embraced “monetarism.”
Based on work by Milton Friedman, who argued
that inflation was always and everywhere a
monetary phenomenon, it was maintained that
by targeting a gradual deceleration in the growth
of money, inflation could be brought under
control with minimal cost. Accordingly, in 1975,
the Bank of Canada adopted a target for the
growth of M1, a narrow monetary aggregate,
which it hoped, if met, would gradually squeeze
inflation out of the system. Money growth
would subsequently be set at a rate that would
be consistent with the real needs of the
economy, but would also ensure price stability
over the long run. While appealing in theory,
monetarism failed in practice. Despite the Bank
of Canada hitting its money-growth targets,
inflation failed to slow as expected. Monetary
targets were abandoned in Canada in 1982. See
page 77 for more details.
Monetary policy was also more accommodative than it should have been through this
period, as the Bank of Canada sought to moderate
the upward pressure on the currency and to
support aggregate demand as the global economy
slowed because of the oil-price shock. In
hindsight, the Bank failed to “recognize the extent
to which the economy in general and the labour
market in particular were coming under strain”
(Bank of Canada Annual Report 1980, 17). In other
words, the Canadian economy was operating closer
to its capacity limits than was earlier believed. Fiscal
policy was also very expansionary through this
period. While the 1974–75 slowdown in Canada
was relatively shallow compared with that in the
United States, where policy was less accommodative, inflationary pressures intensified.
To address these inflationary pressures, an
anti-inflation program, including wage and price
controls, was introduced by the government in late
1975, and the Bank of Canada adopted a target for
the narrow monetary aggregate, M1, with the
objective of gradually reducing the pace of money
growth and thus inflation. After weakening
temporarily in 1975 and falling below parity with
the U.S. dollar, the Canadian dollar recovered in
1976. Wide interest rate differentials with the
United States provided considerable support for the
currency, with provinces, municipalities, and
Canadian corporations borrowing extensively in
foreign capital markets. Foreign appetite for
Canadian issues was enhanced by the removal in
1975 of the 15 per cent federal non-resident
withholding tax on corporate bonds of five years
and over. Foreign borrowing helped to mask the
effects of deteriorating Canadian economic
fundamentals on the Canadian dollar.
The currency moved up to the US$1.03
level during the summer of 1976 in volatile trading,
but the election of a Parti Québécois government
in Quebec on 15 November 1976 prompted
markets to make a major reassessment of the
Canadian dollar’s prospects. Political uncertainty,
combined with softening prices for non-energy
commodities, concerns about Canada’s external
competitiveness related to rising cost and wage
pressures, and a substantial current account deficit,
sparked a protracted sell-off of the dollar.
A History of the Canadian Dollar 75
Canada, $1,
Trudeau just-a-buck, 1972
This example of “political currency” satirizes former
Prime Minister Pierre Trudeau and was circulated during
the campaign of 1972 prior to his second term in office.
76 A History of the Canadian Dollar
Over the next two years, the Canadian
dollar fell significantly, declining to under US$0.84
by the end of 1978. This occurred even though the
U.S. dollar was itself depreciating against other
major overseas currencies and despite considerable
exchange market intervention by the Bank of
Canada on behalf of the federal government to
support the Canadian dollar. To help replenish its
international reserves, the federal government
established a US$1.5 billion stand-by line of credit
with Canadian banks in October 1977. This facility
was increased to US$2.5 billion the following April.
A similar US$3 billion facility was organized in
June 1978 with a consortium of U.S. banks. The
federal government also borrowed extensively in
New York and in the German capital market to
assist in financing the current account deficit and
to support the currency. The Bank of Canada
tightened monetary policy through 1978, with the
Bank Rate rising by 375 basis points to 11.25 per
cent by the beginning of January 1979. Early in
1979, the federal government undertook additional
foreign borrowings, this time in the Swiss and
Japanese capital markets.
