The Canadian authorities soon became worried regarding the weakening of the country's global competitiveness and this sentiment continued all through the later part of the 1950s. The concerns were worsened owing to the robust Canadian dollar that kept on being endorsed by extensive inflow of finances. However, subsequent to the boom in investments during the middle of the 1950s, movement of capital experienced a considerable deceleration and the rate of joblessness was more than twofold from a 3.4 per cent during 1956 to a whopping 7.2 per cent five years later in 1961. In such a situation, the Canadian federal government wanted to facilitate their economic policies with a view to prop up demand and lessen the financial sagging in the fiscal system.
Next, Canada witnessed a bitter worsening in the relations between the Bank of Canada and the scholastic community owing to a limiting financial policy in a situation when there was a comparatively high rate of joblessness and the inflation was near to the ground. As a result, in the latter part of 1960, as many as 29 eminent economists of the country wrote a joint letter to the government demanding the sacking of the Bank of Canada Governor James Coyne. However, these economists were not only against the Bank of Canada authorities, but their relations with the federal government headed by Diefenbaker too started worsening.
Interestingly, the federal government of Canada, which had resolved to follow a policy tending towards expansion, did not think that it had the backing of the Bank of Canada Governor James Coyne in its pursuits. In fact, the state of affairs deteriorated when, despite the Board of Directors' approval, the Diefenbaker government raised objections against the amount of the pension of the Bank of Canada Governor. The differences of opinion between the government and the Bank of Canada were increasingly becoming spiteful and personal and their relationship touched the nadir on May 30, 1960 when the government requested the bank Governor James Coyne to relinquish his post. However, Governor Coyne refused to oblige the government. Consequently, the Minister of Finance brought in a budget that was inclined towards expansion and declared that the Canadian federal government would initiate moves to reduce the valuation of the Canadian currency. At the same time, in his budget note, the Minister of Finance declared that the government would also procure considerable amount of U.S. dollars in the foreign exchange market as per the requirements of the Treasury. Simultaneously, the government introduced a Bill in Parliament - called the Act Representing the Bank of Canada - stating that the post of the Bank of Canada was lying vacant.
Although the House of Commons passed the Bill on July 7, 1960, after hearing the witness of Governor James Coyne, the Senate Standing Committee on Banking and Commerce took a decision on July 12, 1960 concluding that Coyne could not be held responsible for any misdemeanors. The Senate corroborated the panel's findings on the next day - July 13, 1960. Considering the pronouncement of the Senate as a justification of his conduct, the Bank of Canada Governor James Coyne eventually relinquished his position. Following Coyne's resignation, Louis Rasminsky assumed charge as the Governor of the Bank of Canada on July 24, 1961.
In such state of affairs, it was very natural that the Canadian dollar would once again begin to grow weaker. Consequently, the exchange rate of the Canadian dollar fell sharply vis-à-vis the U.S. counterpart from US$1.01 before the declaration of the budget to US$0.97 following the shake-up in the Bank of Canada and the devaluation of the currency. By October 1961, the value of the Canadian dollar deteriorated further and was valued at US$0.96 when the Minister of Finance declared that the suitable mark down of the country's currency alongside the U.S. dollar 'may very much end up to be more than the existing three per cent'.
In a number of manners, the decision of the Canadian authorities to set up a 'controlled' floating exchange rate system that enabled the government to arbitrate with a view to maintain the Canadian dollar at a noteworthy cut rate vis-à-vis the U.S. dollar as against simply easing the variations in the currency's valuation, can definitely be described as a conciliation with the International Monetary Fund. As mentioned earlier, the world financial body was persuading the Canadian authorities to revert to the fixed exchange rate system within the purview of the Bretton Woods arrangement. The IMF, however, did not suggest the Canadian authorities to establish any new 'par value' for the Canadian dollar. Hence, it was felt that the Canadian authorities be given additional time to prepare themselves to set up the fixed exchange rate again.
Between the period November 1961 and March 1962, the Canadian dollar became somewhat stable at approximately US$0.95. However, in spite of considerable intercession by the Bank of Canada on behalf of the federal government to prop up the currency, the value of the Canadian dollar started failing further once again. Eventually, the federal government of Canada consistent with the International Monetary Fund set up a new 'par value' for the Canadian dollar at US$0.925 with a variation braid of ± one per cent.
Despite setting up the exchange rate at a distinctly lesser plane, the Canadian authorities could do little to alleviate the strain on the Canadian dollar. Considering the political insecurity existing in the country at that time, people were skeptical regarding the feasibility of the new exchange rate. Hence, strong official involvement became necessary to contain the value of the Canadian dollar well inside its permissible variation binding.
The Canadian federal government initiated a few major steps on June 24, 1962 with a view to support the currency and boost up the sagging economy of the country. On this day, the governments declared an important fiscal and economic agenda intended for reinstating people's trust on the Canadian dollar and specified its resolve to preserve the new 'par value' of the Canadian dollar. In order to fulfill its commitment, the government initiated a number of actions, including strengthening of the financial and monetary policy, enforcement of a provisional import surcharge and collecting US$1,050 million economic assistance from the global community. The whopping economic support of US$1,050 million comprised drawing US$300 million from the International Monetary Fund, obtaining a US$400 million overdraft or line of credit from the United States Export-Import Bank, acquiring US$250 million under a mutual exchange facility between the Bank of Canada and the Federal Reserve Bank of New York and getting and additional US$100 million from the Bank of England under a parallel agreement. In addition to this, several other European central banks were also prepared to offer more economic support provided it was required.
According to the expectations of the Canadian government, the economic and financial program announced by it on June 24, 1962 yielded the desired results and helped to reinstate trust on the Canadian dollar. As the inflow of private capital resumed around the second half of the same year, the Canadian authorities progressively took the pressure off from the economic emergency actions enforced previously. Moreover, as 1962 came to a close, barring the money drawn from the International Monetary Fund, the Canadian authorities also succeeded in repaying most of the economic support received from the economic community to support its currency. By 1964, they also succeeded in repaying the entire money borrowed from the IMF. The value of the Canadian dollar was preserved comparatively with no trouble for long during the remaining part of the 1960s. During this period, the value of the Canadian dollar was contained well within the permissible variation band of ± one per cent in the region of its US$0.9250 par value.
The buoyancy of the Canadian dollar was a short-lived affair as it experienced a provisional, but extensive descending pressure all through the summer of 1963. The sudden change in the value of the Canadian dollar was a fall-out of a declaration made by the United States on July 18, 1963 regarding the imposition of an 'Interest Equalization Tax' on all foreign loans from the U.S. capital market. Notwithstanding the fact that Canada's existing account shortfall had reduced considerably, by common standards, it was still quite big and hence it too was hit by the U.S. proclamation.
As a result, the proclamation of the Interest Equalization Tax on foreign borrowings from the U.S. capital market by the United States gave rise to a common apprehension that if the Canadian interest rates were not raised by a counter-balancing amount - approximately one hundredth points every year, inflow of finances from the United States would stop. However, the United States consented to free Canada from purview of the 'Interest Equalization Tax' provided that Canada would not enhance its foreign international funds by means of the earnings from accepting loans in the U.S. capital market. Following this agreement with the United States, the descending strain on the Canadian dollar came to an end resulting in the stabilization of the Canadian markets again.
When the United States imposed regulations with a view to restrict the outflow of finances in March 1968, the Canadian dollar once again came under a spell of momentary descending strain. However, the pressure was relieved following an agreement between Canada and the United States on March 7 excusing Canada from the purview of all such regulations. Like in the case of the exemption from the Interest Equalization Tax, this time Canada concurred that its actions would in no way harm the balance-of-payment position of the United States.
Canada entered into a corollary agreement with the United States on December 17, 1968 as there were apprehensions regarding the capability of the Bank of Canada to carry out the financial policies in view of the previous two agreements signed with the United States. According to the latest agreement between the United States and Canada, the U.S. actions would not be directed at any specific level of funds. In effect, the follow-up agreement with the United States enabled the Bank of Canada to get involved in the foreign exchange markets at times when the Canadian dollar would experience any upward strain.
