In this environment, Canadian authorities became increasingly concerned about the inflationary impact of the inflows if Canada tried to ma...
In this environment, Canadian authorities became increasingly concerned about the inflationary impact of the inflows if Canada tried to maintain a fixed exchange rate. There was also concern that the inflows were leading to a “substantial and involuntary increase in Canada’s gross foreign debt” (FECB 1950, 14). On 30 September 1950, Douglas Abbott, the Minister of Finance, announced that Today the Government, by Order in Council under the authority of the Foreign Exchange Control Act, cancelled the official rates of exchange which had been in effect since September 19th of last year .... It has been decided not to establish any new fixed parity for the Canadian dollar at this time, nor to prescribe any new official fixed rates of exchange. Instead, rates of exchange will be determined by conditions of supply and demand for foreign currencies in Canada.
He also announced that any remaining import prohibitions and quota restrictions, imposed in November 1947, would be eliminated, effective Poster for Canada Savings Bond campaign, ca. 1950 62 A History of the Canadian Dollar 2 January 1951. Controls on imports of capital goods were also to be reviewed. Interestingly, the idea of floating the Canadian dollar was widely discussed as early as the beginning of 1949. A then-secret memorandum prepared in January of that year by James Coyne, then Deputy Governor of the Bank of Canada, made the case for floating the currency while retaining exchange controls. In his paper, Coyne noted that it would be better to “have a natural rate which could move up or down from time to time as economic conditions might require.”
He also noted that government inertia made it very difficult for the authorities to adjust a fixed exchange rate in a timely manner (Coyne 1949). Options other than floating the exchange rate were apparently dismissed as impractical, including revaluing the Canadian dollar upwards, widening the currency’s permitted ±1 per cent fluctuation band, or restricting capital inflows. Given the criticism levelled against the government after the 1946 revaluation of the Canadian dollar, followed by the short-lived 1949 devaluation, another revaluation was viewed as unacceptable. It was also unclear how much of a revaluation would be required to stem the capital inflows. Widening the bands also posed problems, since it was unclear how wide the bands would have to be. Likewise, restrictions on capital inflows were seen as untenable from a longer-term perspective for a country dependent on foreign capital (Hexner 1954, 248). This view is consistent with a speech on exchange controls given by Douglas Abbott, Minister of Finance, in December 1951, The conclusion I have come to is that we would be better advised not to rely on exchange restrictions, but rather on the general handling of our domestic economic situation to keep us in reasonable balance with the outside world and to maintain the Canadian dollar over the years at an appropriate relationship with foreign currencies.
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