Canada Breaks the Ice Jam

December 31, 1951

From Sept. 19, 1949, to Sept. 30, 1950, the Canadian dollar, under exchange control, was pegged at 90 American cents. Then the peg was pulled and the rate was left to the mercies of supply and demand. Instead of falling, it went up. It remained around 95 cents, with small fluctuations on either side, until a few weeks ago, when it rose above 97 cents.

On Dec. 14 Canada abolished exchange control entirely. This means that, for the first time in twelve years, Canadians will be able to spend their money for whatever they please, wherever they please. They will again be able, for instance, to buy American securities on the New York Stock Exchange or deal in wheat futures in Chicago. And Americans with investments “frozen” in Canada can now, if they wish, get them out.

Canada thereby becomes the first major country to abolish exchange control. The United States and Switzerland were the only countries that never directly imposed it. Peru, in 1949, set its own currency rate free, but its example attracted little attention. Canada’s step, however, may prove the first real break in the world ice jam of exchange controls. Even Britain seems to have been influenced by it, and has permitted the resumption, within very narrow price limits, of private exchange transactions.

Both the theory and practice of exchange control, in other words, are beginning to fall apart. In Newsweek of Sept. 8, 1947, I wrote: “Nearly every currency in the world . . . is overvalued in terms of the [American] dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity.” But this glaring fact was ignored or denied not only by European but by American bureaucrats, who poured billions of our dollars into Europe to finance its self-created trade deficits.

Then on Sept. 18, 1949, Sir Stafford Cripps completely reversed all his previous pledges and arguments and slashed the pegged rate of the pound from $4.03 to $2.80. Two dozen other nations took similar action within a week. This temporarily improved the balance of world trade; but it was still not the right step. “What was called for,” as I pointed out in Newsweek (Oct. 3 and 31, 1949, and Jan. 9, 1950), “was not continued exchange control with lower fiat rates, but the restoration of free exchanges.”

This is the step that Canada has at last taken. It is the most hopeful international development in many months. The chief remaining obstacle to a world restoration of freedom and sound money is the International Monetary Fund, an unnecessary institution set up, under the influence of the late Lord Keynes and Harry Dexter White, on a completely unsound basis. The minimum reform on which the managers of the Fund should now insist is to strike out Sections 3 and 4 of Article IV of the Articles of Agreement, which prohibit exchange transactions within any country that vary by more than 1 percent from the official parity. This in effect forces the continued imposition of exchange control.

The adherents of exchange control have devised derogatory names for freedom. They call free-market rates “floating” rates, “drifting” rates. What they overlook is that exchange control under fixed police rates merely conceals instability without curing it. It is precisely because free rates do honestly reflect and reveal instability that they force officials to take the steps necessary to restore confidence. And it is precisely this that Finance Minister Abbott of Canada has discovered: “The conclusion I have come to is that we would be better advised not to rely on exchange restrictions but rather on the general handling of our domestic economic situation to keep us in reasonable balance with the outside world.” And the Canadian dollar is strong because he has acted in accordance with this conclusion. For the first seven months of the fiscal year which began April 1, for example, Canada had a budget surplus of $604,700,000. There has been a steadily increasing flow of foreign investment into the country.