History Of The Canadian Dollar
Canada Under Fixed Exchange Rates

An Order-in-Council was passed by the Canadian legislature on September 15, 1939 that introduced regulation of money exchange in the country. Although the Order-in-Council was passed on September 15, it became effective from September 16, 1939 under the jurisdiction of the War Measures Act. While the Foreign Exchange Control Board (FECB) set up by the government began functioning from September 16, the Foreign Exchange Control Order founded an officially authorized arrangement with a view to regulate all foreign exchange deals. At the same time, the government made the Exchange Fund Account active in order to protect the gold and foreign exchange assets of Canada. This Governor of the Bank of Canada was appointed the chairman of the board that was accountable to the Minister of Finance. In addition, all routine affairs of the Foreign Exchange Control Board were also looked after by the staff members of the Bank of Canada.

Depending on the sanction of the Canadian federal ministry, the Foreign Exchange Control Order empowered the Foreign Exchange Control Board to establish the value of the Canadian dollar vis-à-vis the currency unit of the neighboring United States as well as the pound sterling of the United Kingdom. Consequently, the FECB set the value of the Canadian dollar at US$0.9091(one U.S. dollar equivalent to Can$1.10) at buying rate and US$0.9009 (one U.S. dollar equal to Can$1.11) at selling price. Similarly, the purchase rate of the pound sterling was fixed at Can$4.43, while the selling rate was determined to be Can$4.47. The above mentioned foreign exchange rates were approximately uniform with the market rates prevailing just before the Canadian federal government enforced the regulations on foreign exchange. In fact, the Foreign Exchange Control Board even set the currency rates on all future contracts for a time frame of 90 days. It is important to mention here that these foreign exchange rates continued to be effective till the period of the World War II.

The Foreign Exchange Control Board initiated widespread regulations with a view to safeguard the foreign exchange reserves of Canada as well as to perk up the value of the country's monetary unit. The controls introduced by the FECB permitted it to manage the current as well as the capital account dealings. However, the majority of the current account business, barring the travel aspects, was handled quite affably. Following the imposition of the controls, it became mandatory for all residents in Canada to have official sanction for making any reimbursement to non-residents in lieu of importing commodities and services. Official sanction was also mandatory for acquiring foreign money as well as foreign financing. It was essential for the export of money by the travelers and also to convert an individual's category from resident to non-resident Canadian. It was also obligatory for all Canadian residents to sell their proof of foreign exchange payments to any certified broker or dealer. It is interesting to note that during this period, all inter-bank deals in Canadian dollars had come to an end.

The Foreign Exchange Acquisition Order strengthened the regulations more than before on April 30, 1940. Barring a few small omissions, now it became compulsory for all residents of Canada, including the Bank of Canada, to sell all the foreign exchange they were indebted to the Foreign Exchange Control Board.

The move by the Canadian authorities to enforce the regulations to manage the foreign exchange revealed numerous apprehensions. First of all, while the Canadian authorities looked forward to boosting their exports to the United Kingdom following the imposition of the foreign exchange controls, at the same time, there were apprehensions that the surge in Canadian armed operations during the war would considerably enhance the imports from the neighboring United States. A law passed by the United States before the war banning loans to 'antagonistic' nations was the second cause of concern for the Canadian authorities. According the new law passed by the United States, Canada would be required to pay for all its imports from the country in cash - either the U.S. dollar or gold. In addition, considering the foreign exchange controls imposed by the British, Canada's increasing reserve of the pound sterling in the wake of its enhanced exports to the territories where the pound sterling was the unit of currency was of little help to the country as they could not be exchanged for the U.S. dollars. As a final issue, there was a growing concern among the Canadian authorities that henceforth the Canadians were likely to look for investing finances in any non-antagonistic nation. In addition, inhabitants of the United States, who possessed significant amount of Canadian capital, were likely to look for sending their holdings back home.

Interestingly, while the controls imposed by the Canadian authorities on foreign exchange were meant for all foreign currency businesses, in reality the regulation primarily focused on the monetary transactions involving the U.S. dollars. Though the regulation made it mandatory to for people dealing in pound sterling to obtain permission from the concerned authorities, in fact, there was actually no limitations in this regard. In addition, the inhabitants of Canada did not have to sell the proof of payments made in sterling to the Foreign Exchange Control Board (FECB). This was a sign of a large reserve of sterling balances possessed by the FECB. However, this huge reserve of sterling with the FECB could not be exchanged for the U.S. dollars.

It needs to be mentioned here that Canada's requirement for the foreign exchange regulations for the duration of World War II was in disparity with the country's understanding all through World War I when there was no imposition of controls on foreign exchange. The United Kingdom was the most important beneficiary or creditor of Canada's foreign exchange during 1914. This was primarily owing to the volume of British claims on Canada in the way of direct endowments or designated in pound sterling. Moreover, at the time prior to the start of the World War I, the British authorities also possessed considerable amount of U.S. dollars. As a result, the British authorities were able to themselves reimburse for their imports from the United States, sustain a secure and exchangeable currency and also supply U.S. dollars to Canada to resolve Canada's commerce surplus with the United Kingdom.

By 1939, this situation had undergone a sea change. Now, the United States was the major beneficiary or creditor of Canada. While Canada emerged as the prime source of foreign money for the United States, there were apprehensions that nonaligned inhabitants of the United States would not desire to possess the capital or finances of an 'antagonistic' nation. At the same time, the amount of U.S. dollars possessed by the British authorities had diminished greatly during this period. As a result, unlike in 1914, it was no longer possible for the United Kingdom to supply U.S. dollars in exchange of the pound sterling to Canada as a settlement for Canada's surplus trade with the European nation. In fact, at the start of the World War II, the British authorities themselves had introduced a number of regulations with a view to be in charge of the foreign exchange transactions.

It is interesting to note that by the latter part of 1944, the strain of Canada's foreign exchange assets has relieved quite spectacularly. In fact, numerous factors were responsible for the reinforcement of Canada's foreign exchange reserve during this period. These factors included the signing of The Hyde Park Agreement in 1941, the United States joining the World War II in December 1941 and the United States undertaking a number of important infrastructure projects in Canada, including the building the Alaska Highway. Another phenomenon that took place at the same also helped largely in reinstating the foreign reserves of the country. In fact, Canadian citizens residing in the United States pumped in large amount of funds into their country as they sent finances invested in the U.S. securities home. Simultaneously, while even the citizens of the United States now began purchasing Canadian Victory Bonds, the amount of direct investment from the United States also enhanced helping Canada rebuild its foreign exchange reserves.

As a result of the rejuvenation of the Canadian foreign exchange reserves, there was some slackening of the foreign exchange regulations in 1944 with a view to make travel to the United States easy as well as to permit Canadian companies to expand their business in foreign lands. The foreign exchange reserves of Canada, especially gold and U.S. dollars had swelled from a lowly US$187.6 million during the close of 1941, to a whopping US$1,508 million in the closing part of 1945.

Anticipating a persistent inflow of capital from abroad, the Canadian authorities reassessed the value of the Canadian dollar vis-à-vis the U.S. dollar. On July 5, 1946, the new value of the Canadian dollar went up by nine per cent in comparison the U.S. dollar as well as the pound sterling. According to the revised rates for the Canadian dollar, one U.S. dollar was valued at Can$1.000 (purchase price) and Can$1.005 (selling price). Similarly, the value of the Canadian dollar vis-à-vis per pound sterling was set at Can$4.02 (purchase price) and Can$4.04 (selling price). It is interesting to note that the underlying principle for the reassessment of the Canadian dollar was associated more to the diminishing inflationary strains originating from the United States compared to the rejuvenation of the country's foreign exchange reserves or to Canada's favorable balance-of-payments (comparing the amount of foreign currency taken in to the amount of domestic currency paid out) state of affairs. In fact, in one of his declarations made in the House of Commons, the Canadian Finance Minister remarked that the reappraisal of the Canadian dollar was one of the initiatives taken by the federal government with a view to preserve the composition, constancy as well as the sovereignty in all monetary and financial dealings in Canada.

However, the new foreign exchange rate was a short-lived affair. Soon, the volume of imports from the United Stated increased steeply and this resulted to a noticeable deterioration in Canada's gold and U.S. dollar reserves during the latter part of 1946 and throughout 1947. Although exports from Canada to the United Kingdom as well as other countries continued to be vigorous, they failed to help rebuild the country's foreign exchange reserves as they were mostly supported by Canadian loans.

With the foreign exchange reserves declining fast, the Canadian authorities initiated a number of measured that virtually put back the controls on foreign exchange. First of all, the Canadian authorities cut the travel grants for the people of the country visiting the United States. Next, they made the regulations on imports from the United States tighter with a view to minimize the amount of unimportant commodities bought from the neighboring country. The authorities even practically postponed the supplies of the U.S. dollar to the Canadians interested in making direct investment in projects on foreign lands. However, Canada's reserve of gold and the U.S. dollars continued to decline despite the tightening of the controls on foreign exchange. And by the close of 1947, the Canadian reserves of the U.S. dollars diminished to as low as US$501.7 million. Such negative changes on the economic front brought the Canadian federal government under sharp criticism from all quarters, which condemned the government's move to revalue the Canadian dollar in 1946.

The state of affairs improved to some extent in 1948 as Canada's trade deficiency with the United States became narrower. This led to the setting up of a considerable borrowing capacity (line of credit) of the U.S. dollar with the Export-Import Bank of the United States. At the same time, there was an improvement in Canada's balance of trade (balance of payments) with other countries. It needs to be mentioned here that this time the increase was in genuine receipts and not like in 1947 when most of the country's exports were funded by Canadian loans. As a result, the Canadian possession of gold and the U.S. dollars rose by nearly 100 per cent from US$501.7 million in 1947 to US$997.8 million during the close of 1948.

However, the Canadian dollar was once again devalued by around 9.1 per cent vis-à-vis the U.S. dollar on September 20, 1949 as a result of a significant change in the valuations of the pound sterling and currencies of other European nations in comparison with the U.S. dollar. Consequently, the exchange rate of the Canadian dollar in comparison with the U.S. dollar was put back to its value before July 1946. According to the new exchange rate, Can$1.10 was equivalent to US$0.9091 (buying price) and Can$1.105 was valued at US$0.9050 (selling price). Simultaneously, the Foreign Exchange Control Board (FECB) of Canada also fixed fresh official exchange rates for the pound sterling. Now, one pound was worth Can$3.0725 (buying rate) and Can$3.0875 (selling rate).

According to the economists, the primary cause for the sudden devaluation of the Canadian dollar was the probable impact of extensive depreciation in the worth of other currencies on the country's trade balance (balance of payments) situation. At the same time, there were apprehensions that the country's foreign exchange reserves had not made considerable improvement from their depleted position in 1947. Nevertheless, the Canadian dollar once again came under strain owing to the rapidly shifting global economic situations let loose by the Korean War. Interestingly, this time the pressure was to the advantage of the Canadian dollar. Accordingly, the Canadian authorities were once again compelled to review the guiding principles of their foreign exchange rate. This eventually led to the buoyancy (floating) of the Canadian dollar in September 1950 and by the end of the next year, the authorities removed the foreign exchange regulations.

It is important to mention here that soon after the Canadian authorities enforced regulations to administer the exchange rate in 1939 as well as the country's Foreign Exchange Control Board (FECB) establishing an official value of the Canadian dollar in comparison to the U.S. dollar, an unauthorized market for the Canadian dollars came up in New York. This unofficial market for Canadian dollars remained in existence till the Canadian dollar was floated around the latter part of September 1950. In fact, the market that came up in New York was a lawful souk for the non-inhabitants of Canada to trade in the Canadian dollar. However, those residing in Canada were banned from obtaining foreign exchange from this unauthorized Canadian dollar marketplace. In the same manner, no Canadian resident was permitted to exchange foreign currency into Canadian dollars via this unauthorized market.

In fact, the Canadian dollar bank balances maintained by the Canadians residing abroad at a time when the government imposed the regulations on foreign exchange in 1939 comprised the primary foundation of the 'non-transferable' Canadian dollars. In addition, it included assets sales, such as realty, by the residents of the United States as well as the earnings received from the maturity of the securities in Canadian dollars that were reimbursed to the Canadians residing abroad.

Significantly, people purchasing Canadian dollars from the unendorsed or unofficial market in New York could only use them in a restricted way. For instance, the money could not be made use of to acquire commodities or services from Canada. It needs to be mentioned here that in this case, the objective of the regulations imposed on foreign exchange was not only to preserve the existing foreign exchange reserves, but to beef up the acceptance of foreign currency. However, residents of the United States who desired to acquire securities or real estate in Canada were allowed to use the Canadian dollars procured from the unofficial market in New York. The same facility was also extended to foreigners, especially residents of the United States, traveling to Canada.

As discussed earlier, the unendorsed market for Canadian dollars that had come up in New York ceased to exist when the Canadian authorities floated the Canadian dollar in the latter half of 1950. It is interesting to note that during the most part of the unofficial market's continuation, the Canadian dollar was bought and sold at a marked down price in comparison to the official value of the Canadian dollar set by the Foreign Exchange Control Board (FECB). The difference between the valuation of the Canadian dollar in the unofficial New York market and the official rates manifested the strains on the Canadian financial system. This difference in the rates was the maximum all through the gloomy days on 1940 and narrowed down as the World War II moved forward enhancing the expectations of the Canadians. While the discounted value of the Canadian dollar was abolished for a brief period during 1945, the non-transferable Canadian dollar at the unofficial free market in New York traded at a little extra price for one or two months during 1946 before it was reassessed upwards. The new valuation of the Canadian dollar put it at par with the unit of money in the United States.

It is interesting to note that while the official reassessment of the Canadian dollar on July 5, 1946 brought it at par with the U.S. dollar, the value of the non-transferable Canadian dollar did not go up as much as the official money. All through the remaining part of 1946, the inconvertible Canadian dollar was exchanged at rates varying between US$0.95 and US$0.96. This is evident of the fact that people trading the Canadian dollar in the open market did not find the revaluation of the official Canadian dollar too convincing. In reality, over the next few years, the value of the Canadian dollar at the free market declined presaging the ultimate depreciation of the official rate of the Canadian dollar in September 1949.

When the authorities devalued the official foreign exchange rate in 1949, it also had an impact on the non-transferable or inconvertible Canadian dollar, which witnessed a decline in value too. However, the reduction in the value of the inconvertible Canadian dollar was not significant and it provisionally abolished the degree of difference between the official exchange rate and the value of the Canadian dollar at the free market. The degree of difference of approximately 2.5 per cent surfaced once again when the non-transferable Canadian dollar at the free market kept on growing weaker and dropped as low as US$0.8840 all through the winter of 1949-50. However, the disparity between the two rates was done away with once again in March 1950 owing to an unexpected development in the Canadian financial expectations as well as a surge in the flow of finances from the neighboring United States. Just before the Canadian authorities decided to float the Canadian dollar, the unofficial (free market) rate went up to a trivial premium in comparison to the official rate of the Canadian dollar.

Interestingly enough, Canada witnessed a lively debate all through the 1940s on whether the informal rate of the Canadian dollar was its 'accurate' value. However, in its argument, the Bank of Canada claimed that considering the 'restricted usage' of the non-transferable Canadian dollars and its diminutive market range, under no circumstances were the prices a true manifestation of the attitude towards the Canadian dollar.

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