The revaluation of 1946 By late 1944, pressure on Canada’s foreign exchange reserves had eased dramatically. The Hyde Park Agreement of Ap...
The revaluation of 1946 By late 1944, pressure on Canada’s foreign exchange reserves had eased dramatically. The Hyde Park Agreement of April 1941, the entry of the United States into the war in December 1941, as well as major U.S. infrastructure projects on Canadian soil (such as the construction of the Alaska Highway) contributed to a rebuilding of Canada’s foreign exchange reserves. There were also significant capital inflows into Canada, partly from Canadian residents repatriating funds invested in U.S. securities, but also from U.S. residents buying Canadian Victory Bonds. U.S. direct investment in Canada also increased. The rebuilding of reserves allowed a slight easing of exchange controls in 1944 to facilitate travel to the United States and to allow Canadian firms to extend their foreign business activities. By the end of 1945,
Canada’s holdings of gold and U.S. dollars had increased to US$1,508 million from only US$187.6 million at the end of 1941. With expectations of continued capital inflows, the Canadian dollar was revalued upwards by roughly 9 per cent against both the U.S. dollar and the pound sterling on 5 July 1946. The new rates were: Can$1.000 buying, Can$1.005 (US$0.9950), selling for the U.S. dollar; and Can$4.02 buying and Can$4.04 selling for the pound sterling. Interestingly, the rationale for the revaluation related more to dampening inflationary pressures emanating from the United States than to the buildup of reserves or to Canada’s balanceof-payments situation. In a statement to the House of Commons, the minister of finance noted that the revaluation of the Canadian dollar was one of the measures taken to maintain order, stability, and independence in Canada’s economic and financial affairs. He added that these measures we feel will go a long way toward insulating Canada against unfavourable external conditions and easing the inflationary pressures which are now so strong (Ilsley 1946, 3181). The Hyde Park Agreement The Hyde Park Agreement permitted Canada and the United States to specialize in the production of war material. Canada concentrated on the production of certain types of munitions, aluminum, and ships required by the United States (FECB 1946, 26). This agreement between Mackenzie King and Roosevelt was drafted, in longhand, by James Coyne, later to become Governor of the Bank of Canada, but who was then seconded to Clifford Clark, Deputy Minister of Finance,
as Financial Attaché at the Canadian Embassy in Washington D.C. A History of the Canadian Dollar 57 The devaluation of 1949 The new exchange rate did not hold for long. Imports from the United States rose sharply, leading to a marked decline in Canada’s holdings of gold and U.S. dollars in the second half of 1946 and through 1947. While Canadian exports to the United Kingdom and other countries remained robust, they were financed largely by Canadian loans. Hence, they did not boost usable reserves. In November 1947, Canadian authorities reduced travel allowances for Canadians visiting the United States and tightened import controls to restrict the importation of non-essential goods. The provision of U.S. dollars for Canadian direct investment abroad was also virtually suspended. Even with the intensification of exchange controls, Canada’s holdings of gold and U.S. dollars declined to US$501.7 million by the end of 1947. These developments led to considerable criticism of the Canadian government for its 1946 decision to revalue the Canadian dollar. The situation eased somewhat in 1948. Canada’s trade deficit with the United States narrowed, a sizable U.S.-dollar line of credit was established with the U.S. Export-Import Bank, and Canada’s trade balance with other countries improved (including an increase in actual receipts). In fact, by the end of 1948, Canada’s holdings of gold and U.S. dollars had doubled to US$997.8 million. Nevertheless, following a major realignment of the pound sterling and most other major European currencies vis-à -vis the U.S. dollar, the Canadian dollar was devalued by approximately 9.1 per cent against its U.S. counterpart on Image protected by copyright 58 A History of the Canadian Dollar 20 September 1949.75 The Canadian dollar thus returned to its pre-July 1946 value against the U.S. dollar of Can$1.10 (US$0.9091) buying and Can$1.105 (US$0.9050) selling. The FECB also established new official rates for the pound sterling: Can$3.0725 buying and Can$3.0875 selling. The main reason cited for the Canadian dollar’s devaluation was the possible effect of the substantial devaluations of other currencies on Canada’s balance-of-payments position. There were also concerns that Canada’s reserves had not recovered sufficiently from their 1947 low (FECB 1949, 7). However, fast-changing international economic conditions, unleashed by the Korean War, placed the new fixed rate under pressure; this time on the upside. As a consequence, Canadian authorities were once again obliged to reconsider exchange rate policy, ultimately leading to the floating of the Canadian dollar in September 1950, and the lifting of exchange controls late the following year. These issues are explored in “A Floating Canadian Dollar,” page 61. The unofficial exchange market Shortly after the imposition of exchange controls in 1939 and the official fixing of the Canadian dollar’s value in terms of the U.S. dollar by the FECB, an unofficial market for Canadian dollars developed in New York that persisted until the Canadian dollar was floated at the end of September 1950. This was a legal market involving transactions in Canadian dollars between nonresidents of Canada. Residents of Canada were prohibited from acquiring foreign exchange through the unofficial market. Similarly, no resident of 75. On 19 September 1949, the pound and the currencies of all other sterling-area countries, excluding Pakistan, were devalued by 30.5 per cent against the U.S. dollar. Concurrently, or shortly thereafter, the currencies of Sweden, Norway, Denmark, and the Netherlands were devalued by roughly 30 per cent.
The currencies of other countries were devalued by smaller amounts—France by about 22 per cent, West Germany by 21 per cent, Portugal by 13 per cent, Belgium by 12 per cent, and Italy by 9 per cent. Image protected by copyright Canada was ever authorized to convert foreign exchange into Canadian dollars through the unofficial market. The source of “inconvertible” Canadian dollars consisted of Canadian-dollar bank balances held by non-residents when exchange controls were introduced in 1939, sales by U.S. residents of certain types of assets (such as real estate), and the proceeds of maturing Canadian-dollar securities paid to non-residents. Canadian dollars purchased in the unofficial market could be used only in a very circumscribed manner. For example, they could not be used to purchase Canadian goods and services. In this regard, the purpose of exchange controls was not just to conserve available foreign exchange but also to maximize the receipt of foreign exchange. U.S. residents wishing to buy Canadian securities or real estate were, however, permitted to use Canadian dollars obtained in the unofficial market, as could travellers to Canada. The unofficial market for Canadian dollars ended with the floating of the Canadian dollar. Throughout most of its existence, the inconvertible Canadian dollar traded at a sizable discount compared with its official counterpart (Chart 4). The spread between the two rates mirrored the pressures on the Canadian economy, widening to more than 10 per cent during the darkest months of 1940 and narrowing as the war progressed and Canadian prospects improved. By 1945, the discount was temporarily eliminated. Indeed, for a few months during 1946, prior to the upward revaluation of the official Canadian dollar back to parity with its U.S. counterpart, the inconvertible Canadian dollar traded at a slight premium in the free market. A History of the Canadian Dollar 59 Chart 4 Canadian Dollar in Terms of the U.S. Dollar Monthly averages (1939–50) 1. September 1939: War is declared, the Canadian dollar is fixed, and exchange controls are imposed. 2. September 1945: World War II ends. 3. July 1946: Canadian dollar revalued. 4. November 1947: Exchange controls tightened. 5. September 1949: Canadian dollar devalued. Source: U.S. Board of Governors of the Federal Reserve System (1943, 1976) 60 A History of the Canadian Dollar Interestingly, when the official rate was finally revalued on 5 July 1946, the inconvertible Canadian dollar, while also appreciating, did not move up the whole amount. It generally traded between US$0.95 and US$0.96 through the remainder of that year. Clearly, the revaluation was not viewed as completely credible by free-market participants. Indeed, the free rate slowly weakened over the next few years, foreshadowing the eventual devaluation of the official rate in September 1949.76 The inconvertible Canadian dollar declined with the devaluation of the official exchange rate in 1949, but to a lesser extent, temporarily eliminating the differential between the two rates. With the inconvertible Canadian dollar continuing to weaken to about US$0.8840 through the winter of 1949–50, a differential of roughly 2.5 per cent temporarily re-emerged. The sudden improvement in Canada’s economic prospects, however, and strong capital inflows from the United States, eliminated the differential between the two rates once again by March 1950. Indeed, the unofficial rate actually moved to a marginal premium to the official rate immediately prior to the decision to float the Canadian dollar.
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