The currency of the Province of Canada, which later came to be known as the Dominion of Canada, was always based on a gold standard from the time of the decreeing of the Currency Act on August 1, 1854 to the occurrence of the World War I in 1914. As per this criterion, the value of the Canadian dollar was in terms of gold and was exchangeable upon demand. In addition, the Canadian dollar was also assessed in the same standing with the United States dollar and with the British sovereign rated at Can$4.8666. It has already been discussed earlier that the gold coins of the United States as well as Great Britain were treated as legal tenders in Canada.
As the Canadian currency was based on the gold standard, the monetary policy of the Dominion of Canada was virtually put on an 'automatic pilot'. In such circumstances, the paper money issued by the government as well as the chartered banks was without any restraint redeemable into gold with no limitations. At the same time, all restrains on the import and export of gold were also removed. Such a situation entailed that the authorities had virtually no opportunity to control the exchange rates or to undertake any autonomous fiscal plan.
It is important to mention here that the variations in the currency exchange rates in the market between the Canadian dollar, the Unites States' dollar as well as the pound sterling respectively about their official assessments were normally restricted by the export and import points of gold. These marks denoted the exchange rates that were gainful for the people in the Dominion of Canada to obtain benefits of the price disparities between the market and authorized currency exchange rates by exporting or importing gold to or from the United Kingdom and the United States. The disparity between the export and import marks as well as the authorized currency exchange rates reveals the expenditures involved in the indemnify as well as shipping of gold to and from New York, London or Montreal - the Canadian economic hub in those days. As New York was relatively closer to the Dominion of Canada, the difference in the exchange rate against the U.S. dollar was slender approximately vis-à-vis the equivalence with a gold export mark being Can$1.0008 and a gold import mark of Can$0.9992. The difference of amount or degree around the $4.8666 at equivalent value of the pound sterling was more extensive to some extent (±1 per cent) considering the fact that in this case the money had to be transported to a greater distance.
The Canadian dollar was seldom exchanged beyond the bounds of the gold points. In fact, trading the Canadian dollar outside the gold mark was considered to be a rare happening which took place after long periods of time. Such incidents took place for much longer periods than anticipated by anyone provided people engaged in arbitrages were really competent enough. This is perhaps an indication of the fact that the probable impediments enforced by the regime with a view to look after their gold stockpile may have hindered their actions. Although this was by no means any especially notable occurrence before 1914, impediments set up by the government to stop transportation of gold across the borders turned out to be a regular trend during the World War I and also throughout the early phase of the 1930s with a view to preserve gold stock of the Dominion of Canada.
The American Civil War of 1862 had an adverse impact on the currency of the United States. With the Union government's fiscal conditions worsening, the banks in the United Stated postponed the exchanging the notes issued by them for gold. Similarly, the Union government also deferred the privilege to redeem the United States Treasury notes (paper currency issued by the government) in gold. Soon after this, the United States Congress granted the Union government permission to issue legal tenders that were non-redeemable. These new non-convertible legal tenders were commonly called the 'greenbacks'. Although the government did not mention anything regarding the convertibility of the 'greenbacks' in future into gold, common people were generally of the opinion that they would be once again redeemable once the war had been won. In fact, redeeming 'greenbacks' into gold began by the middle of January 1862 in New York and carried on with a brief break till January 1, 1879 when the United States once again based its currency on the gold standard.
It needs to be mentioned here that right from the time when people started trading with the greenback, these legal tenders decreased in value vis-à-vis gold and other currencies together with the Canadian dollar which continued to be based on the gold standard. The limitation of the greenback was certainly a major reason for the quick growth in the issuance of the United States notes which grew steeply in just a little over a year - from $150 million in the early part of 1862 to $450 million in March 1863. In addition, the variations in the value of the greenback hinted the Union government's military and political fate as well as the popular anticipation that the government will finally be in a position to exchange the greenbacks for gold. In fact, the value of the greenback depicted an inclination to go up with every victory of the Union Army, like in the Battle of Gettysburg in 1863, and decline rapidly whenever the Union Army experienced set-backs.
However, the value of the greenbacks touched the lowest point in the summer of 1864 as the Union government provisionally stopped all gold trading for a period of two weeks in the latter half of June 1864 with a view to curb the activities of the speculators. Prior to this, in the early part of July, the Confederate made advances in the direction of Washington and Baltimore and conducted raid operations in the province of Pennsylvania. According to data availed from that period, the value of the greenback issued by the United States declined sharply from being nearly equivalent to the Canadian dollar during the near the beginning of 1862 to below 36 Canadian cents (i.e. one Canadian dollar valued at US$2.78) on Monday, July 11, 1864. Significantly, this valuation also denotes the highest value ever attained by the Canadian dollar vis-à-vis the United States dollar!
By the time the American Civil War ended in April 1865, the 'greenback' slowly but surely started salvaging its value, so much so that its worth almost doubled. Although a little slow, but the greenback maintained its pace of progression even after the Civil War as the Union government withdrew a considerable sum of the greenbacks in circulation during the period between 1866 and 1868. As the country witnessed a deflation after the Civil War, the United States once again reverted to the gold standard on January 1, 1879 and made the greenback redeemable into gold at the rates prevailing before the war - 23.22 grains of gold. As a result of this change, the Canadian dollar was once again exchangeable with the U.S. dollar at an equal valuation. This rate of assessment continued to be in existence till the World War I broke out in 1941.
