major exporter of commodities

 Canada’s money provides a unique optic
through which to examine this country’s rich
economic and political history. Through this lens,
we can witness the clash of empires in the
eighteenth century, the building of a continentspanning nation during the nineteenth century, and
the development of a “post-modern,” bilingual,
multicultural society in the late twentieth century.
We can also see the economic pressures
brought to bear on Canada and the ingenuity of
Canadians in dealing with them. Born of necessity,
de Meulles’ introduction of card money in 1685 is
believed to be the first issue of paper money by a
Western government. The Great Depression and
deflation of the 1930s also challenged the orthodox
monetary wisdom of the time, leading once again
to monetary experimentation and to the creation of
the Bank of Canada.
Canada’s monetary history also illustrates
the strong economic attraction of the United States,
as well as the weakening economic and political ties
with the United Kingdom. North-south economic
linkages were the reason why Canada, over
imperial opposition, chose the dollar instead of the
pound as its monetary standard in the 1850s.
However, in a typical Canadian compromise, both
U.S. and British coins remained legal tender in
Canada, alongside distinctive Canadian notes and
coins, into the 1930s.

 A similar tension can be found in Canada’s
choice of exchange rate regime. Through much of
the nineteenth and early twentieth centuries, a fixed
one-for-one exchange rate was maintained between
Canada and the United States, supported by both
countries’ adherence to the gold standard. Such a
relationship seemed natural in light of the close
commercial and financial links between the two
On the other hand, the Canadian economy,

 a major exporter of commodities, was, and remains,
very different from that of the United States, a
major supplier of manufactured goods. This
distinction, as well as a desire in Canada to direct
macroeconomic policy towards achieving domestic
policy objectives, argues for a flexible exchange rate.
These factors were the reasons why Canada adopted
a floating exchange rate in 1950 and again in 1970.
Canada’s history has shown, however, that
no exchange rate regime is perfect. The choice of
regime involves trade-offs that may change with the
passage of time and with differing circumstances.
A History of the Canadian Dollar 85
Concluding Remarks
86 A History of the Canadian Dollar
Dissatisfaction with the severe policy limitations of
the gold standard led Canada and other countries
to break the link between their currencies and
gold during the 1930s. Dissatisfaction with the
competitive devaluations and “beggar-thyneighbour” policies of the Depression years led to
the Bretton Woods system of fixed, but adjustable,
exchange rates after the Second World War.
Dissatisfaction with pegged exchange rates in an
environment of global inflationary pressures and
rising capital mobility led to the floating of all major
currencies in 1973.

 The launch of the euro on 1 January 1999
and the collapse of fixed exchange rate regimes in
many emerging-market economies led to a renewed
debate in Canada and abroad on appropriate
exchange rate regimes. The debate in Canada
was also fuelled by the persistent weakness of the
Canadian dollar and a view held by some
economists that a common North American
currency was appropriate and, possibly, inevitable.
But the weight of economic analysis and opinion
continue to favour Canada maintaining its flexible
exchange rate, and retaining its monetary policy
Until relatively recently, however, it was not
clear that Canada and other countries with floating
exchange rates had used their monetary independence to their best advantage. Immediately prior to
the floating of the Canadian dollar in 1970, Harry
Johnson, the great Canadian monetary economist,
noted that
[a] flexible exchange rate is not, of course, a panacea;
it simply provides an extra degree of freedom, by
removing the balance-of-payments constraint on
policy formulation (Johnson 1972).
This observation was prophetic. Through
the following decades, exchange rates, liberated
from the constraints imposed by the Bretton Woods
system, moved in a wide range, reflecting both real
and monetary shocks in the domestic economy and
in the anchor country; i.e., the United States. The
Canadian dollar was no exception. While countries
were now free to direct policy at achieving domestic
objectives, the “extra degree of freedom” was often
squandered. In Canada, the rationale behind
floating the Canadian dollar in 1970 was to avoid
importing U.S. inflation. In the event, Canada’s
inflation performance was very similar to that of
the United States. (See Chart A3 in Appendix A.)
David Laidler, a noted monetary economist
and economic historian at the University of
Western Ontario, has argued that a flexible
exchange rate, unlike a fixed rate, is not a coherent
monetary order, since a flexible rate does not
“define a policy goal, but merely permits some
other goal . . . to be pursued” (Laidler 2002). For
a country with a flexible rate to have a coherent
94. For a review of the economic arguments for flexible exchange rates in North America, see Murray, Schembri, and St-Amant (2003). See also Murray
and Powell (2003) for a discussion of the extent to which U.S. dollars are used in Canada. See also Thiessen (2000) and Dodge (2002).
monetary order, other elements are required—a
clear goal for monetary policy (and a broader supportive policy framework that includes sustainable
fiscal policy), credibility, and public accountability.
Laidler contended that such a coherent monetary
order was not firmly in place in Canada until about
1995. This was four years after inflation targets were
introduced and 25 years after Canada last floated
the dollar. It was only when a coherent monetary
order was established that the Bank of Canada was
in a position to use its policy independence to its
best advantage by focusing on preserving the
domestic purchasing power of the Canadian
dollar through low inflation, while at the same time
allowing the external value of the currency to
adjust to shocks.

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