Since the Middle Ages, silver and gold have been known as a universal form of currency. Over time, this widespread, voluntary acceptance of gold as currency is what ultimately led to the introduction of gold standard in the 1800’s. By 1853 Canada had readily implemented this standard, a standard that not only ensured less variability in its domestic price level but also acted as an international standard. Aside from certain short-term shocks, seemingly flawless long-term price stability continued for the next 60 years in Canada.
I first, would like to investigate the economic events that lead to the end of this gold standard era. Following this demise, I will look into Canada’s failed attempt to return to this standard, as well as Canada’s new form of stabilizing its dollar that ensued and has continued to present day. Canada’s economic growth and strong commitment to the gold standard all came crashing down 1914 with the beginning of World War 1. As tension built between countries, Canada officially suspended its convertibility of bank notes into gold.Because of this, there was an immediate meeting between the Government of Canada and the Canada Bankers Association to discuss the crisis. What followed was a new legislation called “An Act to Conserve the Commercial and Financial Interests of Canada”.
This new legislature essentially gave the government the power to act as a lender of last resort to the banking system – one of the powers you see today with our central bank. It was widely presumed that after the war, all major countries would return to the gold standard.Following the US and the United Kingdom, Canada did indeed go back onto the gold standard but this was short-lived. The monetary operations under the revised Financial Act of 1923, which was created during the paper money period, was inconsistent with maintaining a gold standard. This Financial act, in addition to the excessive monetary expansion that Canada underwent, is what most economists believe to be the ultimate cause for the demise of the gold standard.Canada officially suspended the redemption of Dominion notes for gold 1933.
Since failing its final attempt at the gold standard, Canada has alternated between floating the dollar and fixing it with the US. Whether or not to allow the exchange rate to be fixed or floating was argued amongst many economists, including Milton Friedman who was a strong advocate for the floating rate. By 1970, Canada subsequently decided upon a floating rate and has continued as such since then.The lifeblood of any economic system is money, which has evolved into many different forms, with the most fundamental of them being gold.
The Canadian dollar had been officially defined in terms of gold for a long period up until the start of WW1. Following the war Canada struggled to return back to the gold standard and subsequently failed. Today and for the majority of the last 60 years, a floating rate has proven to be the most economically suitable exchange rate for our great Canadian dollar.
