The devaluation of the Canadian dollar in comparison to the United States' dollar in 1949 along with the skyrocketing prices of commodities (high inflation) and the outbreak of the Korean War in June 1950 together had reinforced Canada's balance of trade with the neighboring United States considerably by the middle of 1950. Canadian exports received a further enhancement with the financial resurgence in Europe. The economy of the European nations augmented with the support of the Marshall Plan that made exchangeable U.S. dollars available to them. At the same time, Canada witnessed a robust surge in direct investments, while there was a steep enhancement in the inflow of temporary or short-term finances into the country. This took place especially during the third quarter of 1950 while there was a growing assumption as regards to the reassessment of the Canadian dollar.
Despite the encouraging fiscal situation involving strong inflows of finances, the Canadian authorities appeared to be a concerned lot. In such a situation, they were getting more and more worried regarding the inflationary effect of the surge in finances in the event of continuing with an unchanging or fixed foreign exchange rate. At the same time, they were also apprehensive about the fact that the inflow of finances was resulting in a 'considerable as well as a spontaneous' enhancement of Canada's combined foreign arrears.
Interestingly, though the authorities established a floating exchange rate for the Canadian dollar in 1950, they had begun toying with the idea and carefully deliberated on the proposal for over a year, since the start of 1949. It has been said that the then Deputy Governor of the Bank of Canada, James Coyne had prepared a confidential memorandum espousing the concept of setting up a flexible exchange rate for the Canadian dollar, and at the same time, preserving the existing foreign exchange regulations. In the document prepared by him, James Coyne remarked that 'an accepted and adjustable exchange rate that was capable of freely moving up and down now and then as per the requirements of the fiscal system' was always preferable and superior to the fixed exchange rate. In addition, the then Deputy Governor of the Bank of Canada observed that it was not an easy task to regulate a fixed foreign exchange rate in an opportune way owing to the inactivity or sluggishness of the federal government.
It seems that the Canadian authorities rejected all other alternatives apart from the idea of a balanced or floating foreign exchange rate as unfeasible. The dismissed options also included the idea of an upward revision of the value of the Canadian dollar expanding the money's permissible ±1 per cent variation braid or limiting the inflow of finances. According to the Canadian authorities, another revaluation of the currency was undesirable considering the sharp criticism they faced following the reassessment of the Canadian dollar in 1946 and the subsequent temporary depreciation of the money in 1949. At the same time, they were also unsure as to the extent of reassessment of the currency required with a view to curtail the inflow of finances. On the other hand, expanding the binding would also create difficulties for the Canadian authorities as they were not sure as regards to the extent to which the foreign exchange braid needed to be widened. Similarly, from a long-term view point, the Canadian authorities also considered that the limiting the inflow of funds was indefensible for the country that was largely reliant on foreign funds.
It needs to be mentioned here that although the then Deputy Governor of the Bank of Canada James Coyne visualized floating of the Canadian dollar in an arrangement that would also ensure maintaining the regulations on foreign exchange as early as in 1949, the idea was actually implemented with the opening of the markets on October 2, 1950. Soon, the Canadian dollar increased in value rapidly with the government allowing inter-bank trading. In fact, the valuation of the Canadian dollar rose by approximately five per cent to be equivalent to US$0.95.
Soon after the authorities established a floating exchange rate for the Canadian dollar people began to raise questions regarding the justification of the persistence of the regulations on foreign exchange. As a result, the authorities gradually alleviated the controls on foreign exchange during 1951. Eventually, the Canadian legislature passed an Order-in-Council on December 14, 1951 withdrawing the Foreign Exchange Control Regulations. In its place, the Canadian authorities passed new rules that absolved all individuals as well as businesses from the obligation of obtaining permits to be able to trade in foreign exchange. In fact, the Foreign Exchange Control Act that was previously rejuvenated for a period of two more years in 1951 was finally abolished in October 1952.
Immediately after the authorities introduced a floating exchange rate for the Canadian dollar, the currency rose rapidly to be valued at US$0.95. Following this, the Canadian dollar carried on increasing in value at a more moderate pace progressing to a little premium of approximately two per cent in comparison to the U.S. dollar in 1952. From this period onwards and till the end of 1960, the Canadian dollar did business at a comparatively slender assortment varying between US$1.02 and US$1.06. During this period, the Canadian dollar also hit the highest valuation at US$1.0614 on August 20, 1957. In it interesting to note that at the same time, the government also restricted the role of the Bank of Canada's involvement in foreign exchange by way of the Exchange Fund Account to smoothing the temporary variations in the value of the Canadian dollar.
Although the business community usually disapproved the floating exchange rate of the Canadian dollar, it was endorsed by several intellectual economists. These economists viewed the floating exchange rate of the currency as a way to protect the domestic financial system from outside distresses - both in the event of inflation and deflation. At the same time, it was acknowledged that the mutual perils related to a supple exchange rate were capable of reducing inflow of large amounts of finances.
It is interesting to note that the success of the experiment in establishing a floating exchange rate for the Canadian dollar had encouraged many academicians to undertake substantial scholastic researches on the advantages of having a supple exchange rate arrangement during the major part of the 1950s. Later, when the Bretton Woods arrangement of permanent exchange rates disintegrated in the early part of the 1970s, the Canadian flexible exchange rate served as a perfect prototype for the other nations of the world to follow.
Since Canada was a member of the International Monetary Fund (IMF), the country's move to establish a floating exchange rate for the Canadian dollar was at a variance with its obligation to the IMF to sustain a fixed exchange rate in accordance with the Brentton Woods arrangement for permanent exchange rates. Keeping this oddity in view, the Canadian authorities had set up with the IMF a 'par value' (a nominal value depicted on the head side of a currency) of US$0.9091 with a variation binding of ± one per cent in 1949. In fact, even this decision of the Canadian authorities was implemented under stiff resistance from the staff of the IMF who had suggested that the country adopt a policy including very strong foreign exchange intervention or imposes regulations to restrict the inflow of finances. At the same time, the IMF staff expressed worries over the fact that Canada had allegedly humiliated the international monetary organization as well as put it in a situation of jeopardy. According to the IMF, the decision taken by Canada was tantamount to a terrible case in point for the other lesser responsible members of the world organization. However, it needs to be noted here that, in any case, the decision to have a floating exchange rate for the Canadian dollar was initially considered to be a provisional measure.
Canada once again returned to the good books of the International Monetary Fund when it reintroduced a fixed exchange rate for its currency approximately 12 years later. As a result of this, Canada now began to be looked upon as a nonconformist nation in the economic circles worldwide. It appears that the reluctance of the Canadian authorities to reassess the exchange rate mirrored the concern of the world economic community over the country going over the gaffe it committed in 1946 once again. It may be mentioned here that in 1946, the Canadian authorities had made an upward reassessment of the currency, but it came under considerable descending strain in the following year and this subsequently led the authorities to devalue the Canadian dollar again in 1949. The appeal to re-peg the currency diminished after this since it appeared that Canada possessed the best of all the worlds, including a non-equitable trading arrangement, a free currency market as well as a rationally unwavering foreign exchange rate. Interestingly enough, though the actions initiated by Canada were not in line with the International Monetary Fund's activities, the end result of these moves were definitely in accordance with the objectives of the world finance body.