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Exchange Stabilization in Canada, 1950–4*

Published online by Cambridge University Press:  07 November 2014

Harry C. Eastman  and
Stefan Stykolt
Harry C. Eastman
Affiliation:
University of Toronto
Stefan Stykolt
Affiliation:
University of Toronto
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Extract

On October 1, 1950, Canadian authorities abandoned the policy of maintaining a fixed rate of exchange for the Canadian dollar for the first time since the beginning of the Second World War. Thereafter the dollar was allowed to fluctuate with little interference from official quarters. The significance of this event extends beyond the evolution of exchange policy in Canada, for it must have affected the attitudes of those countries that have been studying a more flexible exchange system than the one envisaged by the Articles of Agreement of the International Monetary Fund.

Canadian monetary authorities have been pursuing a policy designed to reduce changes in the value of the Canadian dollar. Official policy has been described as follows: “Transactions of the Exchange Fund Account in the market in United States dollars were directed to helping to maintain orderly conditions without preventing basic supply and demand factors from determining the level of the rate.” It is argued in this paper that a stabilizing agency that operates according to the commonly accepted principle of resisting all movements in the rate does not, in fact, contribute to that rate's stability. An examination of the operations of the Canadian Exchange Fund Account from September, 1950, to December, 1954, supports this argument. An analysis of the meaning of stabilizing policy will precede the discussion of Canadian experience.

Type
Research Article
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 22 , Issue 2 , May 1956 , pp. 221 - 233
Copyright
Copyright © Canadian Political Science Association 1956

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Footnotes

*

The authors are grateful to Professor V. W. Bladen for having suggested this topic for investigation. Harry C. Eastman was a member of the Economists' Summer Study Group at Queen's University in 1954 and spent some time there on this study.

References

1 Canada, Foreign Exchange Control Board, Annual Report to the Minister of Finance for the Year 1951, 19.Google Scholar

2 Friedman, Milton, Essays in Positive Economics (Chicago, 1953), 188.Google Scholar The authors acknowledge gratefully a number of helpful suggestions made by Professor Friedman.

3 It is assumed that private dealers in exchange have resources sufficient to stabilize the rate.

4 Since no assurance exists that, on the days when the reserves of foreign exchange are valued, the actual rate is at the normal level, revaluation losses or gains may appear even in the absence of an upward or downward trend in the value of foreign currency. With a trend, revaluation losses or gains may be either exaggerated or understated by departures of the actual rate from its trend value on the day of initial or of final valuation, or on both days.

Revaluation gains cannot be taken to indicate a consistently rising trend through the period, nor can revaluation losses be interpreted as results of a consistently falling trend. The trend may have reversed itself during the accounting period and the rate, although higher at the end than at the beginning, may be falling or, alternatively, though lower at the end than at the beginning, may be rising.

5 Except for reasons already discussed above: see footnote 4.

6 The total volume of exchange transactions is greater than the sum of all transactions set out in the balance of international payments because entries in the capital account are on a net basis.

7 Harry C. Eastman, “Le Taux canadien de devises étrangères,” Société Belge d'Etudes et d'Expansion, Bulletin Bimestriel, no. 159, 39–43.

8 This paper is concerned only with transactions involving United States dollars and gold.

9 Foreign Exchange Control Board, 1951 Report, 21.Google Scholar

10 Minister of Finance, “Exchange Fund Account, Notes on Statement of Assets and Liabilities for 1952 Compared with 1951” (typed, n.d.).

11 Minister of Finance, “Exchange Fund Account, Comparisons of 1953 with 1952 Figures” (typed, n.d.).

12 Budget White Taper, April 6, 1954, 74.

13 In 1952, U.S. $248.4 million were purchased and resold; the profit that resulted was Cdn. $.4 million, or at a rate of .16 per cent. Minister of Finance, “Exchange Fund Account, Comparisons of 1952 with 1951 Figures” (typed, n.d.).

14 February, April, May, and July, 1951; May and October, 1952.

15 One of those occasions was the sale of U.S. $82 million by the Fund in May, 1953, in connection with a repurchase by the federal Government of $72.7 million worth of Government bonds from an American insurance company.

16 Under the Foreign Exchange Control Regulations existing on September 30, 1950, authorized dealers, that is, the banks, could enter into forward contracts of up to 90 days with residents of Canada to cover net forward positions arising from firm commercial commitments involving the importation and exportation of goods. Longer contracts had to be approved by the Foreign Exchange Control Board. Forward rate protection was not made available for capital transactions.

From the withdrawal of official rates on September 30, 1950, to the end of exchange control on December 17, 1951, authorized dealers could enter into any type of forward contract with residents of Canada, but they could deliver the exchange sold only for purposes for which they were permitted to sell spot exchange.

17 Foreign Exchange Control Board, 1951 Report, 19, 20.Google Scholar

18 While official rates were in force, the buying rate for 90-day forwards was at a per cent discount below the spot buying rate of $1.10.

19 Foreign Exchange Control Board, 1950 Report, 22.Google Scholar

20 The holdings of the Exchange Fund Account fell short of total holdings of gold and United States dollars by perhaps as much as $200 million, for some United States dollars were held by the Bank of Canada. On the other hand, at September 30, 1950, an abnormally large amount of foreign exchange, approximately $112 million, was in transit to the Exchange Fund Account but was not included in figures for official holdings of gold and United States dollars. Dominion Bureau of Statistics, The Canadian Balance of International Payments in the Post-War Years, 1946–1952 (1953), 104.Google Scholar

21 Foreign Exchange Control Board, 1951 Report, 20.Google Scholar

22 The forward exchange rate on the United States dollar and the pound sterling has moved in close harmony with the theoretical forward exchange rate parity when not interfered with. See Macintosh, R. M., “The Day-to-Day Loan Market: A Year Later,” Canadian Banker, autumn, 1955.Google Scholar