Inflation erodes the purchasing power of
money. Even with a low annual inflation rate of
2 per cent (the midpoint of the Bank of Canada’s
1 to 3 per cent target range for inflation since 1995),
a dollar will lose half of its purchasing power in
approximately 35 years. When the consumer price
index (CPI) is used to measure inflation, the average
annual rate of inflation in Canada since 1914 is
3.2 per cent. Thus, the Canadian dollar lost more
than 94 per cent of its value between 1914 and
2005 (Chart A1). Alternatively, one dollar in 1914
would have the purchasing power of $17.75 in
2005 dollars.1
While consumer price data prior to 1914
are unavailable, a broader measure of inflation, the
gross domestic product (GDP) deflator, is available
back to 1870 (Leacy 1983).
While the CPI and GDP
deflator can diverge, they tend to move together
over time. Since 1870, with annual GDP inflation
averaging 3.6 per cent, the Canadian dollar has lost
more than 96 per cent of its value. Again, this is
equivalent to saying one Canadian dollar in 1870
would have the purchasing power of roughly $26.70
in today’s money.
Periods of high inflation include the early
years of the twentieth century, when major
infrastructure projects in Canada were financed by
large inflows of foreign capital, and the years during
and immediately following the two world
wars, owing to the cost of the war effort and
Appendix A
Purchasing Power of the Canadian Dollar
1. The Bank of Canada has an inflation calculator on its website (www.bankofcanada.ca) that shows changes in the costs of a fixed basket of consumer
purchases from 1914 to the present.
Chart A1
Purchasing Power of the Canadian Dollar
1914 = 100
Source: Leacy (1983)
demobilization. More recently, high inflation was
experienced during the 1970-80s, owing to the oil
crises and policy errors (Chart A2).
In contrast, prices fell during the early
1920s, when Canada experienced deflation on its
return to the gold standard and during the
Great Depression of the 1930s. Prices also fell
episodically during the last decades of the
nineteenth century.
To provide a different perspective on the
purchasing power of the Canadian dollar, Table A1
lists indicative prices of selected food staples since
1900. As can be seen, the cost of a pound of butter
has risen from about 25 cents at the beginning of
the twentieth century to about $4.00 today. At the
same time, a labourer in 1901 would have earned
14 to 15 cents an hour in Halifax or Montréal
and 23 cents in Toronto.2 In contrast, the 2005
A History of the Canadian Dollar 89
Chart A2
Inflation in Canada
Year-over-year percentage change
Source: Leacy (1983)
2. Leacy (1983), “Hourly wage rates in selected building trades by city,”
series E248–267. The earliest available data point for a western province is 1906.
At that time, the average labourer in Vancouver would earn 35 cents per hour.
Image protected by copyright
90 A History of the Canadian Dollar
minimum wage in Canada ranged from $6.30 an
hour in New Brunswick to $8.00 an hour in
British Columbia.
In 1905, the average production worker in
a factory earned $375 per year, while the average
supervisory and office employee earned $846.3 In
2004, the average annual income of a person
working in the manufacturing sector was $42,713.
The average manager’s salary was $70,470.4
A significant portion of the increase in salaries
since the early 1900s would reflect the impact of
inflation.
Other currencies also lost domestic
purchasing power over time owing to inflation. In
Chart A3,
one can see that while Canada’s accumulative inflation performance has been significantly
better than that of the United Kingdom over the
period since 1914, our performance has been largely
the same as that of the United States. Only in the
last ten years or so, has Canada averaged a lower
rate of inflation than the United States.
In terms of gold, the Canadian dollar has
depreciated markedly over the years, much of this
occurring since the early 1970s. One ounce of gold
was worth $20.67 in 1854 when the Currency Act
was passed in the Province of Canada, fixing the
Canadian dollar at par with the U.S.-dollar, equivalent to 23.22 grains of gold. In 1933, the statutory
price of gold in Canada was the same, $20.67 per
3. Leacy (1983), “Annual earnings in manufacturing industries, production and other workers,” series E41–48.
4. Statistics Canada, Manufacturing: Trades, Transport and Equipment Operators & Related Occupations and Manufacturing: Management Occupations.
Table A1
Indicative Prices of Selected Food Staples, December (dollars)
Beef (sirloin) per lb.
Bread (loaf)
Butter (one lb.)
Eggs (one dozen)
Milk (quart)
1900
0.14
0.04
0.26
0.26
0.06
1914
0.24
0.05
0.35
0.45
0.10
1929
0.35
0.08
0.48
0.65
0.13
1933
0.19
0.06
0.26
0.45
0.10
1945
0.43
0.07
0.40
0.56
0.10
1955
0.80
0.13
0.64
0.70
0.21
1965
1.10
0.18
0.63
0.64
0.26
1975
2.34
0.43
1.11
0.92
0.43
1985*
3.81
1.00
2.51
1.34
1.12
1995
5.05
1.30
2.87
1.63
1.46
2005**
6.99
1.79
4.01
2.22
1.97
Source: The Labour Gazette, Dominion Bureau of Statistics, Statistics Canada
*October
**June
ounce. The official U.S.-dollar price of gold was
raised to US$35 per ounce (roughly the same in
Canadian dollars) on 31 January 1934 when
President Roosevelt’s administration took steps to
reflate the U.S. economy during the Great
Depression. The US$35 per ounce price remained
fixed until 15 August 1971 when President Nixon
broke the link between the U.S. dollar and gold. In
Canadian dollars, one ounce of gold was worth
about $35.40 on that date. In late October 2005,
the market price of an ounce of gold stood at
roughly $550 in Canadian funds (or about
US$465).
5 In other words, the Canadian dollar has
lost about 96 per cent of its value in terms of gold
since 1933, with much of this occurring since
August 1971, while the U.S. dollar has lost roughly
95 per cent of its value.
Periods of rapid inflation, as well as
episodes of significant deflation, in Canada over the
past century or more underscore the importance of
the Bank of Canada’s objective of maintaining low,
stable, and predictable inflation. If an economy is
to perform well, its citizens must have confidence
that the value of the money they use is broadly
stable—that is to say subject to neither chronic
inflation or deflation. Both inflation and deflation
create uncertainty about the future and can have a
significant negative impact on the economy. Their
effects also do not fall equally on the population.
Unexpected inflation or deflation redistributes
income and wealth, between borrowers and lenders,
and between generations. Consequently, to avoid
the burden that inflation or deflation imposes on
an economy, it is important for a central bank to
pursue a monetary policy that is firmly focused on
achieving and maintaining price stability.6