The revaluation of 1946
By late 1944, pressure on Canada’s foreign
exchange reserves had eased dramatically. The Hyde
Park Agreement of April 1941, the entry of the
United States into the war in December 1941, as
well as major U.S. infrastructure projects on
Canadian soil (such as the construction of the
Alaska Highway) contributed to a rebuilding of
Canada’s foreign exchange reserves. There were also
significant capital inflows into Canada, partly from
Canadian residents repatriating funds invested in
U.S. securities, but also from U.S. residents buying
Canadian Victory Bonds. U.S. direct investment in
Canada also increased.
The rebuilding of reserves allowed a slight
easing of exchange controls in 1944 to facilitate
travel to the United States and to allow Canadian
firms to extend their foreign business activities.
By the end of 1945,
Canada’s holdings of gold and
U.S. dollars had increased to US$1,508 million from
only US$187.6 million at the end of 1941.
With expectations of continued capital
inflows, the Canadian dollar was revalued upwards
by roughly 9 per cent against both the U.S. dollar
and the pound sterling on 5 July 1946. The new
rates were: Can$1.000 buying, Can$1.005
(US$0.9950), selling for the U.S. dollar; and
Can$4.02 buying and Can$4.04 selling for the
pound sterling. Interestingly, the rationale for the
revaluation related more to dampening inflationary
pressures emanating from the United States than
to the buildup of reserves or to Canada’s balanceof-payments situation. In a statement to the House
of Commons, the minister of finance noted that
the revaluation of the Canadian dollar was one of
the measures taken to maintain order, stability, and
independence in Canada’s economic and financial
affairs. He added that
these measures we feel will go a long way toward
insulating Canada against unfavourable external
conditions and easing the inflationary pressures which
are now so strong (Ilsley 1946, 3181).
The Hyde Park Agreement
The Hyde Park Agreement permitted Canada
and the United States to specialize in the
production of war material. Canada concentrated on the production of certain types of
munitions, aluminum, and ships required by
the United States (FECB 1946, 26). This
agreement between Mackenzie King and
Roosevelt was drafted, in longhand, by James
Coyne, later to become Governor of the Bank
of Canada, but who was then seconded to
Clifford Clark, Deputy Minister of Finance,
as
Financial Attaché at the Canadian Embassy in
Washington D.C.
A History of the Canadian Dollar 57
The devaluation of 1949
The new exchange rate did not hold for
long. Imports from the United States rose sharply,
leading to a marked decline in Canada’s holdings of
gold and U.S. dollars in the second half of 1946
and through 1947. While Canadian exports to the
United Kingdom and other countries remained
robust, they were financed largely by Canadian
loans. Hence, they did not boost usable reserves.
In November 1947, Canadian authorities
reduced travel allowances for Canadians visiting the
United States and tightened import controls to
restrict the importation of non-essential goods. The
provision of U.S. dollars for Canadian direct
investment abroad was also virtually suspended.
Even with the intensification of exchange controls,
Canada’s holdings of gold and U.S. dollars declined
to US$501.7 million by the end of 1947. These
developments led to considerable criticism of the
Canadian government for its 1946 decision to
revalue the Canadian dollar.
The situation eased somewhat in 1948.
Canada’s trade deficit with the United States
narrowed, a sizable U.S.-dollar line of credit was
established with the U.S. Export-Import Bank,
and Canada’s trade balance with other countries
improved (including an increase in actual receipts).
In fact, by the end of 1948, Canada’s holdings
of gold and U.S. dollars had doubled to
US$997.8 million.
Nevertheless, following a major realignment
of the pound sterling and most other major
European currencies vis-à-vis the U.S. dollar,
the Canadian dollar was devalued by approximately 9.1 per cent against its U.S. counterpart on
Image protected by copyright
58 A History of the Canadian Dollar
20 September 1949.75 The Canadian dollar thus
returned to its pre-July 1946 value against the U.S.
dollar of Can$1.10 (US$0.9091) buying and
Can$1.105 (US$0.9050) selling. The FECB also
established new official rates for the pound sterling:
Can$3.0725 buying and Can$3.0875 selling.
The main reason cited for the Canadian
dollar’s devaluation was the possible effect of the
substantial devaluations of other currencies on
Canada’s balance-of-payments position. There
were also concerns that Canada’s reserves had
not recovered sufficiently from their 1947 low
(FECB 1949, 7).
However, fast-changing international
economic conditions, unleashed by the Korean War,
placed the new fixed rate under pressure; this time
on the upside. As a consequence, Canadian authorities were once again obliged to reconsider exchange
rate policy, ultimately leading to the floating of the
Canadian dollar in September 1950, and the lifting
of exchange controls late the following year.
These issues are explored in “A Floating Canadian
Dollar,” page 61.
The unofficial exchange market
Shortly after the imposition of exchange
controls in 1939 and the official fixing of the
Canadian dollar’s value in terms of the U.S. dollar
by the FECB, an unofficial market for Canadian
dollars developed in New York that persisted until
the Canadian dollar was floated at the end of
September 1950. This was a legal market involving
transactions in Canadian dollars between nonresidents of Canada. Residents of Canada were
prohibited from acquiring foreign exchange through
the unofficial market. Similarly, no resident of
75. On 19 September 1949, the pound and the currencies of all other sterling-area countries, excluding Pakistan, were devalued by 30.5 per cent against
the U.S. dollar. Concurrently, or shortly thereafter, the currencies of Sweden, Norway, Denmark, and the Netherlands were devalued by roughly
30 per cent.
The currencies of other countries were devalued by smaller amounts—France by about 22 per cent, West Germany by 21 per cent, Portugal
by 13 per cent, Belgium by 12 per cent, and Italy by 9 per cent.
Image protected by copyright
Canada was ever authorized to convert foreign
exchange into Canadian dollars through the
unofficial market.
The source of “inconvertible” Canadian
dollars consisted of Canadian-dollar bank balances
held by non-residents when exchange controls
were introduced in 1939, sales by U.S. residents of
certain types of assets (such as real estate), and the
proceeds of maturing Canadian-dollar securities
paid to non-residents.
Canadian dollars purchased in the unofficial
market could be used only in a very circumscribed
manner. For example, they could not be used to
purchase Canadian goods and services. In this
regard, the purpose of exchange controls was not
just to conserve available foreign exchange but also
to maximize the receipt of foreign exchange. U.S.
residents wishing to buy Canadian securities or real
estate were, however, permitted to use Canadian
dollars obtained in the unofficial market, as could
travellers to Canada.
The unofficial market for Canadian dollars
ended with the floating of the Canadian dollar.
Throughout most of its existence, the inconvertible
Canadian dollar traded at a sizable discount
compared with its official counterpart (Chart 4).
The spread between the two rates mirrored the
pressures on the Canadian economy, widening to
more than 10 per cent during the darkest months
of 1940 and narrowing as the war progressed
and Canadian prospects improved. By 1945, the
discount was temporarily eliminated. Indeed, for a
few months during 1946, prior to the upward
revaluation of the official Canadian dollar back to
parity with its U.S. counterpart, the inconvertible
Canadian dollar traded at a slight premium in the
free market.
A History of the Canadian Dollar 59
Chart 4
Canadian Dollar in Terms of the U.S. Dollar
Monthly averages (1939–50)
1. September 1939: War is declared, the Canadian dollar is fixed, and
exchange controls are imposed.
2. September 1945: World War II ends.
3. July 1946: Canadian dollar revalued.
4. November 1947: Exchange controls tightened.
5. September 1949: Canadian dollar devalued.
Source: U.S. Board of Governors of the Federal Reserve System (1943, 1976)
60 A History of the Canadian Dollar
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.
