History of
Filed Under Canadian Currency |
Political union Canada on took place on February 10, 1841 and led to a new standardized rating for coins in the two Canadas that took effect in April of 1842. The British gold coin was valued at one pound, four shillings, and fourpence in local currency, while the $10 US gold eagle was valued at two pounds, ten shillings. Both coins were considered legal tender. Spanish and U.S. silver dollars were also made legal tender 8 with a currency trading value of five shillings and one pence.
Confederation on July 1, 1867 brought changes to banking and currency legislation in the provinces of Canada, Nova Scotia, and New Brunswick. Under the BNA Act, the federal government was given exclusive jurisdiction over currency trading and banking. Provincial notes issued in the Province of Canada were renamed “dominion notes” and were made redeemable in Halifax and Saint John in addition to Montreal and Toronto. The Dominion Notes Act was extended to cover Prince Edward Island, Manitoba, and British Columbia in 1876 and the Northwest Territories in 1886.
On August 3, 1914, an emergency meeting was held in Ottawa between the government and the Canadian Bankers Association to discuss the currency crisis. An Order-in-Council was issued that provided protection for banks that were threatened by insolvency by making notes issued by the banks legal tender. This allowed the banks to meet their depositor demands with their own bank notes rather than with dominion notes or gold. The government also increased the amount of notes that banks were legally permitted to issue. The government was also allowed to make advances to banks by issuing dominion notes against securities deposited with the minister of finance.
Public hearings began on August 8, 1933, and the final report was given to the government less than seven weeks later on September 28. While the commission voted in favor of the establishment of a central bank, its conclusion was never really in doubt. The two British members of the committee, joined by Brownlee, voted in favor of a central bank, a position supported by both the Conservative government and the Liberal opposition.
White dissented from the majority on the grounds that it was unwise to establish a central bank in the prevailing uncertain economic environment. In their view, a newly established and untried central bank might hinder the government. Favoring a return to the gold standard, White contended that Canada’s main problem was excessive debt. Leman shared this view and also believed that the establishment of a central bank raised constitutional issues that needed exploring.
As a member of the International Monetary Fund, Canada’s decision to float the Canadian dollar was at odds with its commitment to the Fund to maintain a fixed exchange rate within the Bretton Woods system. In this regard, in 1949 the Canadian authorities had established with the IMF a “par value” of US$0.9091 with a fluctuation band of per cent. At least initially, floating was viewed as a temporary state of affairs. The minister of finance noted the government’s intention to remain in consultation with the Fund and it would be almost 12 years before Canada reintroduced a fixed exchange rate and regained the good graces of the IMF. Consequently, Canada came to be viewed as something of a maverick in international financial circles. The unwillingness to re-fix the exchange rate appears to have reflected concern about repeating the mistake of 1946 when the dollar was revalued upwards only to come under significant downward pressure the next year, followed by a devaluation in 1949.
After quickly rising to the $0.95 USD level immediately after the exchange rate was freed, the Canadian dollar slowly appreciated, moving to a small premium of about 2 per cent vis-à-vis the U.S. dollar by 1952. From then until the end of 1960, it traded in a relatively narrow range between US$1.02 and US$1.06. The peak for the Canadian dollar during this period was US$1.0614, touched on 20 August 1957. Foreign exchange intervention by the Bank of Canada through the Exchange Fund Account was limited to smoothing short-run fluctuations of the Canadian dollar.
Weakness in the currency began to emerge in 1997 and became increasingly apparent in 1998 despite strong economic fundamentals–very low inflation, moderate economic growth, and solid government finances. Much of the slide in the currency could be attributed to lower commodity prices, which began to soften in the summer of 1997 but weakened significantly as the financial and economic crisis in emerging markets widened and intensified. The large negative interest rate differentials that had earlier opened up between Canadian and U.S. financial instruments also weighed against the Canadian dollar, as did the U.S. dollar’s role as a safe-haven currency during times of international crisis. The Canadian dollar touched an all-time low of US$0.6311 on August 27, 1998 before recovering somewhat following aggressive action by the Bank of Canada. Interest rate reductions by the Federal Reserve Bank and the return of a modicum of stability in financial markets permitted the Bank of Canada to reduce Canadian interest rates without undermining confidence in the Canadian dollar. The currency closed the year at US$0.6522.
This history of the Canadian dollar has been largely descriptive. Nonetheless, conclusions can be drawn from examining the past. Although Canada has tried most major types of exchange rate regime, it has generally favored a flexible exchange rate system through much of the twentieth century. This has reflected three factors: Canada’s role as a major commodity producer and exporter; the high degree of capital mobility, especially between Canada and the United States; and a desire to direct macroeconomic policy towards achieving domestic objectives. In this regard, concern about importing inflation from the United States led to the upward revaluation of the Canadian dollar in 1946 during the holocaust timeline and to the floating of the Canadian currency in both 1950 and 1970. To present day the Canadian Dollar has greatly appreciated and sits near par on Christmas 2007.
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By N2H