History Of The Canadian Dollar
1926 - 1931
Back To The Gold Standard

The notes issued by the chartered banks were deprived of their status as legal tenders or official money when Canada reverted to the gold standard. However, the Finance Act included a stipulation that stated that the government was able to restore the status of the notes issued by the banks in the Dominion of Canada in an urgent situation. As a result of this change, once more money in Canada comprised the British gold sovereigns and other contemporary British gold coins, the United States' gold eagles (equivalent to $10), double eagles and even half eagles. After retuning to the gold standard, the Canadian legal tenders also included the country's gold coins in the valuation of $5 and $10 as well as the Dominion paper currency. The government also granted the silver, nickel and bronze coins produced by the mints in Canada the status of limited or partial legal tender.

However, it may be noted here that Canada's resumption of the gold standard was only a temporary affair. The reason behind this was the contention that the functioning of a fiscal system under the provisions offered by the Finance Act were not in agreement with continuing with a gold standard. In fact, the Dominion paper currency supplied to the banks as per the provisions or under the privilege of the Finance Act on the guarantee of collaterals was not secured by gold. Nevertheless, the Dominion notes were exchangeable for gold on demand.

A section of contemporary economists draw attention to the disproportionate fiscal expansion in the Province of the Dominion all through the later part of the 1920s that finally led to the failure of its currency based on the gold standard. The proportion of the gold stocks vis-à-vis the Dominion paper currency remarkably dropped from 54 per cent on June 30, 1926 to 28 per cent in just three years afterwards. Some other economists have highlighted the reluctance of the Canadian authorities to recognize the order of the gold standard, particularly at a time when there was a major global fiscal tension. A decline in the price of goods that led to the worsening of Canada's international trade was also an important aspect for the termination of the gold standard. The money of the other nations such as Australia and Argentina, which were deeply bankrupt nations that manufactured several commodities, too came under major descending stress all through the period between 1929 and 1931.

Between 1928 and 1931, the Canadian dollar underwent three spells of vulnerability and the government initiated steps that were detrimental for improving the situation. Under normal situations in a pure gold standard, the government should have without doubt allowed the export of gold when the value of the Canadian dollar waned further than the gold export point. However, instead of permitting the export of gold, the government depended more and more on several gold devices to prevent the export of gold. For instance, although the law stipulated that gold be made available either in Montreal or Toronto, the government made it obtainable only in Ottawa which only added to the problems as well as expenditures incurred in exporting gold. In the same way, the authorities took another wrong step by supplying the British gold sovereigns or bullion instead of making the United States' gold coins available. This increased the problems of trade as the British gold sovereigns and bullion had to be evaluated freshly before the authorities in the United States allowed them. As an alternative to this, the authorities only supplied coins of small denominations. It is interesting to note that the authorities often also attempted to persuade people who shipped bullions.

Since there was a major drainage of gold from the country, it was evident that the authorities would soon hike the Advance Rate (the interest charged by the government on the advance payments it made to the chartered banks) with a view to tackle the situation. Although the special rate at 3.75 per cent remained unchanged, the government hiked the 'common rate' from 3.75 per cent to 5 per cent on June 9, 1928. With a view to smooth the process of the sale of the exclusive issue of the 4 per cent Treasury notes, it seems that the government had given the banks an assurance to mark down these legal tenders at such particular fee. In the autumn of 1928, the strain on the Canadian dollar was relieved owing to a number of aspects related to the season, the government again lowered the 'common rate' from the enhance 5 per cent to 4.5 per cent. In spite of the value of the Canadian dollar dropping beyond the gold export point all through the latter part of 1929 and the early phase of 1930 as well as in the summer of 1931, this marked down rate continued to be in existence till the latter part of October 1931.

Although not in form, in reality Canada abandoned the gold standard in 1929. Nevertheless, the government did not prohibit exporting gold till it issued an Order-in-Council on October 21, 1931. Interestingly enough, both the government as well as the banks resorted to persuasion tactics by means of appeals to patriotism to influence as well as pressurize the Canadians not to redeem Dominion paper currency into gold. Nevertheless, the gold standard was eventually discarded on September 21, 1931 when the United Kingdom adopted a politically distressing, but financially sensible decision in this regard.

Once again the Canadian dollar experienced an acute downhill strain along with a common loss of trust in the international fiscal system when the pound sterling started falling steeply from its earlier preset valuation of US$4.8666 to a dismal low of US$3.40 through the period instantly after the decision of the British authorities to promote the currency. Basically, the international money markets also stopped operating as borrowers like Canada were not capable of having a loan of even interim money in New York. Even the worries of the depositors were now centered on Canada's indecisive pledge vis-à-vis the gold standard, the country's mounting debts as well as it poor gold stocks. In such a milieu, the value of the Canadian dollar dropped near to the ground at approximately US$0.80 during the autumn of 1931 prior to its resurgence.

When the government issued an Order-in-Council legitimately on April 10, 1933 deferring the convertibility of the Dominion paper currency into gold eventually dealt the final blow to Canada's observance of the gold standard. Like in the case of other nations which abandoned the gold standard in the 1930s, the move by the Canadian authorities was also looked forward to as a provisional measure and people generally expected the gold standard to return following the improvement in the economic scenario worldwide.

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