Canadian Dollars

The story of the Canadian dollar begins in the currency chaos of the early French and British colonial period in North America. 1 Through the seventeenth century and until well into the nineteenth, various coins from many countries circulated freely in the colonies. These included not only English and French coins, but also coins from Portugal, Spain, and the Spanish colonies in Latin America--notably Mexico, Peru, and Colombia. The hazards of sea travel and persistent trade imbalances with the home country left the colonies chronically short of coins.

In an effort to attract fresh supplies, French and British colonial authorities typically gave higher values to coins circulating in their jurisdiction than to the same coins circulating in England and France. For example, in New France, coins under the monnoye du pays system during the late seventeenth century were given a value one-third higher than monnoye de france. Similarly, British colonies in North America valued the silver Spanish dollar at rates of up to 8 shillings, despite the passage of legislation by the British government (Act for Ascertaining the Rates of Foreign Coins in Her Majesty's Plantations in America) in 1707 that valued the coin at 4 shillings and 6 pence. 2 The chronic coin shortage also encouraged the introduction of paper money. The most famous issue is undoubtedly the card money of New France. Introduced in 1685, card money initially consisted of playing cards cut to different sizes according to denomination and signed by colonial officials. Despite the protests of authorities in Paris, who objected to the loss of budgetary control, there were several issues of card money before it was withdrawn from circulation in 1719. Card money reappeared in 1729, however, and remained readily accepted until rising inflation, associated with the financing of the Seven Years' War during the 1750s, undermined confidence in its value.

To add to the confusion, different colonies rated coins differently. Sometimes, certain coins were deliberately overrated (i.e., overvalued) or underrated (undervalued) relative to others, given their weight in gold or silver, in order to encourage or discourage their use. In such circumstances, overrated coins drove underrated coins from circulation--an application of Gresham's Law, "bad money drives out good." Underrated coins were typically hoarded or shipped to colonies that valued them more highly. To counteract this, colonial legislatures periodically revised their ratings. Ratings were also revised in response to other factors, including the decline in the value of silver relative to gold throughout the eighteenth and nineteenth centuries and the gradual wearing of old coins (which lowered their weight and reduced their intrinsic value).

The Halifax and York ratings

One rating that became particularly important in British North America was the Halifax rating. Named after the city of Halifax, where it was first used, this rating was given legal standing by an act of the first Nova Scotia House of Assembly in 1758 (McQuade 1976). This rating used pounds, shillings, and pence (ВЈ, s. and d.) as the unit of account and valued one Spanish (or colonial Spanish) silver dollar weighing 420 grains (385 grains of pure silver 3 ) at 5 shillings, local currency. This valuation of the Spanish dollar, the most common coin in circulation at that time, was to be used in settling debts. In effect, the Spanish dollar became legal tender in Nova Scotia. Although the British imperial authorities overturned the legislation in 1762, since it did not conform to the 1707 Imperial Act, the rating remained in common use and was later adopted in Quebec by the British authorities after the Seven Years' War, as well as in New Brunswick and Prince Edward Island. The Halifax rating, with some modifications, persisted well into the mid-1800s. In contrast, following the U.S. War of Independence, Upper Canada used the York rating, as did merchants in Montreal, for a time. 4 This rating had originally been established in New York and was brought to Upper Canada by Loyalist immigrants (Turk 1962). In York currency, one Spanish dollar was valued at 8 shillings. Although an 1821 act re-established the use of the Halifax rating in Upper Canada and, hence, valued one Spanish dollar at 5 shillings, the York rating remained in use in rural areas until the unification of Upper and Lower Canada in 1841.

Dollars and cents or pounds, shillings, and pence?

During the eighteenth century and the first half of the nineteenth, the pound sterling (pounds, shillings, and pence) was the unit of account in British North America. Given the scarcity of British coins, however, and the prevalence and wide acceptance of Spanish silver dollars, it became increasingly difficult to maintain a currency system based on sterling. The introduction of the U.S. dollar (modelled on the Spanish dollar) in the United States in 1792, together with growing trade links between Upper and Lower Canada and the United States, also favoured the use of dollars. The widespread use and popularity of the dollar stymied periodic efforts by the imperial authorities in British North America to establish a common monetary system throughout the British Empire based on pounds, shillings, and pence. It is therefore not surprising that when Sir Isaac Brock issued up to ВЈ250,000 worth of Army Bills in Lower Canada in 1812, to help finance the War of 1812, the bills were denominated in Spanish dollars. Army Bills became legal tender in both Upper and Lower Canada until their redemption shortly after the war ended.

The first bank notes in Canada, issued by the Montreal Bank following its establishment in 1817, were also denominated in dollars. 5 These notes could be redeemed in coin, upon demand. As new banks were incorporated in Upper and Lower Canada during the 1830s and 1840s, their bank notes were typically denominated in both dollars and pounds. These notes circulated freely through both Canadas and in the United States. Dollar-denominated bank notes issued by U.S. banks also circulated widely in Upper Canada during the early 1800s. This two-way movement of notes across the Canada-U.S. border strongly favoured the continued use of dollars and cents in Canada over pounds, shillings, and pence. In contrast, bank notes circulating in New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland, before Confederation, were typically denominated in pounds, shillings, and pence. This reflected both the stronger ties these provinces had with Great Britain and their weaker commercial links with the United States.

After quickly rising to the US$0.95 level immediately after the exchange rate was freed, the Canadian dollar slowly appreciated, moving to a small premium of about 2 per cent vis-Г -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. While unpopular in business circles, the floating exchange rate was strongly supported by academic economists as a means of insulating the domestic economy from external shocks, either inflationary or deflationary. It was also recognized that the two-way risk associated with a flexible exchange rate could itself lessen large capital movements (Hexner 1954, 253). Canada's successful experiment with a flexible exchange rate regime through much of the 1950s inspired considerable early academic work on the merits of a flexible exchange rate system. Later, it would provide a model for the rest of the world when the Bretton Woods system of fixed exchange rates finally collapsed during the early 1970s.

Concluding Remarks

This history of the Canadian dollar has been largely descriptive. Nonetheless, useful conclusions can be drawn from examining the past. Although Canada has tried most major types of exchange rate regime, it has generally favoured 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 and to the floating of the Canadian dollar in both 1950 and 1970.

It is evident, however, that no exchange rate regime is perfect. The choice of regime involves trade-offs that may change with the passage of time and differing circumstances. Dissatisfaction with the severe policy limitations of the gold standard led Canada and other countries to break the link between their currencies and gold during the 1930s. Dissatisfaction with the competitive devaluations and "beggar-thy-neighbour" policies of the Depression years led to the Bretton Woods system of fixed, but adjustable, exchange rates after the Second World War. Dissatisfaction with pegged exchange rates in an environment of global inflationary pressures and rising capital mobility led to the floating of all major currencies in 1973. Most recently, the debate on appropriate exchange rate regimes has been renewed in Canada and abroad, spurred by the launch of the euro and by the collapse of fixed exchange rate regimes in many emerging-market economies. The outcome of this debate is uncertain, but the choice of regime will clearly depend on the national circumstances and preferences of countries as they enter the twenty-first century.