The relevance of the unofficial rate During the 1940s,


Interestingly, when the official rate was
finally revalued on 5 July 1946, the inconvertible
Canadian dollar, while also appreciating, did not
move up the whole amount. It generally
traded between US$0.95 and US$0.96 through the
remainder of that year. Clearly, the revaluation was
not viewed as completely credible by free-market
participants. Indeed, the free rate slowly weakened
over the next few years, foreshadowing the
eventual devaluation of the official rate in
September 1949.76
The inconvertible Canadian dollar declined
with the devaluation of the official exchange rate
in 1949, but to a lesser extent, temporarily
eliminating the differential between the two rates.
With the inconvertible Canadian dollar continuing
to weaken to about US$0.8840 through the winter
of 1949–50, a differential of roughly 2.5 per cent
temporarily re-emerged. The sudden improvement
in Canada’s economic prospects, however, and
strong capital inflows from the United States,
eliminated the differential between the two rates
once again by March 1950. Indeed, the unofficial
rate actually moved to a marginal premium to the
official rate immediately prior to the decision to
float the Canadian dollar.
The relevance of the unofficial rate
During the 1940s, 

there was an active
debate over whether the unofficial rate was the
“true” value of the Canadian dollar. The Bank of
Canada maintained that, given the “limited use” of
inconvertible Canadian dollars and the small size of
the market, prices were not necessarily an accurate
reflection of sentiment towards the Canadian dollar
(FECB 1947, 5).77
This was disputed by many economists,
including then-associate professor of economics,
Milton Friedman. In a 1948 University of Chicago
debate with Donald Gordon, Deputy Governor of
the Bank of Canada, 

and Dr. W. A. Mackintosh,
head of the economics department at Queen’s
University and wartime economic adviser to the
government, Friedman argued that there was no
particular reason why a small market should
necessarily lead to a distorted price. He also argued
strongly that Canada should introduce a flexible
exchange rate rather than relying on a system of
exchange controls to balance trade. Gordon, on
the other hand, contended that a 10 per cent
decline in the official Canadian dollar (to roughly
the level prevailing in the unofficial market) would
have comparatively little impact on trade flows
(Friedman et al. 1948).
While there is no evidence directly linking
Milton’s Friedman’s advice to Canada’s subsequent
decision to float the Canadian dollar, it undoubtedly had an impact on the internal thinking of the
Bank of Canada.

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