The dollar in the 1980s
Throughout the 1980s, the Canadian dollar
traded in a wide range, weakening sharply during
the first half of the decade, before staging a strong
recovery during the second half. Early in the
period, the Bank’s policy was to moderate the
effects of large swings in U.S. interest rates on
Canada, taking some of the impact on interest rates
and some on the exchange rate (Bank of Canada
Annual Report 1980). For the Bank to react in this
way, it needed more flexibility, and in March 1980,
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the Bank Rate was linked to the rate for threemonth treasury bills, which was established at the
weekly bill auction.91 Canadian short-term interest
rates rose sharply through 1980 and into the
summer of 1981, with the Bank Rate touching an
all-time high of 21.24 per cent in early August
1981,
before moderating through the remainder of
the year. At the same time, the Canadian dollar
came under significant downward pressure.
Important factors behind its depreciation included
political concerns in the lead up to the Quebec
referendum in May 1980, weakening prices for
non-energy commodities, and the introduction of
the National Energy Program by the federal
government in October 1980, which prompted a
wave of takeovers of foreign-owned firms by
Canadian-owned firms, particularly in the oil sector.
By mid-1981,
policy-makers became concerned that
the exchange rate slide would begin to feed on
itself. Consequently, the minister of finance asked
the chartered banks to reduce their lending to
finance corporate takeovers that would involve
outflows of capital from Canada.
Nevertheless, confidence in the Canadian
dollar continued to erode through 1982 on
concerns about the commitment of Canadian
authorities to an anti-inflationary policy stance, and
the cancellation of a number of large energy
projects. With the dollar falling below US$0.77,
the Bank of Canada allowed short-term interest
rates to rise to prevent the increasing weakness
of the Canadian dollar “from turning into a
speculative rout” (Bank of Canada Annual Report
1982, 20). The Bank also reluctantly announced in
November 1982 that it would no longer target M1
in its fight against inflation. Among other things,
financial innovation had undermined the link
between money growth and inflation. Research also
revealed that the small changes in interest
rates needed to keep money growth on track
were insufficient to really affect prices or output.
In testimony before the House of Commons
Finance Committee, Governor Bouey said “We did
not abandon M1, M1 abandoned us” (House of
Commons 1983, 12). In other words, narrow
money growth had failed to provide a reliable
monetary anchor.
While the currency recovered to about
US$0.82 on the Bank of Canada’s actions and on
positive market reaction to the introduction of a
restrictive budget by the federal government, the
respite proved to be short-lived. Although for the
most part, the Canadian dollar held its own against
its U.S. counterpart through 1983, it weakened
sharply in 1984 and the first half of 1985, as did
other major currencies, as funds were attracted to
the United States by high interest rates and
relatively favourable investment opportunities.
In September 1985, amid growing concerns
about global external imbalances and speculative
pressures in favour of the U.S. dollar, the G-5 major
industrial countries agreed in the Plaza Accord to
bring about an orderly depreciation of the U.S.
dollar through a combination of more forceful
concerted exchange rate intervention and domestic
A History of the Canadian Dollar 77
91. The Bank Rate had previously been set in this manner between late 1956 and early 1962.
policy measures. Although the overseas currencies
began to appreciate against the U.S. dollar, the
Canadian dollar continued to depreciate against its
U.S. counterpart on concerns about weakening
economic and financial prospects in Canada and
falling commodity prices. The failure of two
small Canadian banks—the Canadian Commercial
Bank and the Northland Bank—may have also
temporarily weighed against the Canadian dollar.
After touching a then-record low of US$0.6913
on 4 February 1986, the dollar rebounded, following
78 A History of the Canadian Dollar
The Plaza and Louvre Accords
Named after the Plaza Hotel in New York, the
Plaza Accord was a 1985 agreement among
France, West Germany, Japan, the United States,
and the United Kingdom aimed at correcting large
external imbalances among major industrial
countries and resisting protectionism. In addition
to encouraging an orderly depreciation of the U.S.
dollar, each country agreed to specific policy
measures that would boost domestic demand in
countries with a surplus, notably Japan and West
Germany, and increase savings in countries with
deficits, especially the United States. Two years
later in Paris, the G-5 countries, along with
Canada, agreed to intensify their economic policy
coordination in order to promote more balanced
global growth and to reduce existing imbalances.
It was also agreed that currencies were now
broadly in line with economic fundamentals and
that further exchange rate shifts would be resisted.
The success of policy coordination among
industrial countries remains a hotly debated issue.
While global protectionist pressures were averted,
overly expansionary policy in Japan contributed to
a speculative bubble in asset prices that subsequently collapsed, causing considerable and lasting
damage to the Japanese economy. The ability of
concerted exchange rate intervention to influence
the value of the U.S. dollar has also been the
subject of considerable controversy.
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A History of the Canadian Dollar 79
a concerted strategy of aggressive intervention in
the foreign exchange market, sharply higher interest
rates, and the announcement of large foreign
borrowings by the federal government. Initially
stabilizing at about US$0.72, the dollar began an
upward trend against the U.S. dollar, which lasted
through the remainder of the decade.
In February 1987, Canada joined other
major industrial countries in the Louvre Accord
aimed at intensifying policy coordination among the
major industrial countries and stabilizing exchange
rates. Pursuant to this Accord, Canada participated
on several occasions in joint interventions to
support the U.S. dollar against the German mark
and the Japanese yen. Although the Canadian
dollar dipped briefly following the stock market
“crash” in October—the Toronto Stock Exchange
(TSE) fell 17 per cent over a two-day period—it
quickly recovered.
Through 1988 and 1989, the currency
continued to strengthen owing to various factors,
including a buoyant economy led by a rebound in
commodity prices, expansionary fiscal policy at
both the federal and provincial levels, and a
significant tightening of monetary policy aimed at
cooling an overheating economy and reducing
inflationary pressures. Positive investor reaction to
the signing of the Free Trade Agreement (FTA)
with the United States in 1988 also supported the
currency.92 The Canadian dollar closed the decade
at US$0.8632.