Canada Takes the Lead

October 16, 1950

The decision of Canada to permit a free market in its dollar may be the first real break in the ice jam of international exchange control.

Exchange control is a totalitarian device first systematically applied by Schacht in Nazi Germany, then endorsed by the late Lord Keynes of Britain and embodied, under his leadership, in the International Monetary Fund.

The Fund was Keynes’s proposed substitute for the gold standard. The gold standard was a triumph of international cooperation. It established in effect a single world currency. For when each country’s monetary unit was convertible on demand into a fixed weight of gold it was also necessarily convertible at a fixed rate into all other monetary units. And the monetary managers of each country could keep their currency on gold only by refraining from inflation or any other act that undermined confidence.

Keynes was opposed to all this, partly because he was at heart—as he confessed in an article in the Yale Review in 1933—an economic isolationist. He resented having England’s internal price level tied to the international price level. He dreamed of a system in which England’s monetary managers could manipulate their own internal price level—by inflation and devaluation—so as to keep constant “full employment” at home regardless of what was going on in the rest of the world. And he actually succeeded in selling to the world’s assembled monetary “experts” at Bretton Woods the idea that gold convertibility was not needed to sustain or stabilize a currency’s value—that the purchasing power of engraved scraps of paper could be made whatever the monetary managers of that country chose to say it was. But to peg them for a while he proposed the Fund, an institution pledged to use the relatively hard currencies (chiefly the U.S. dollar) to buy the soft currencies at whatever arbitrary valuations their governments put upon them.

This system had to be supported by exchange control—that is, by using each government’s police power to forbid anybody to buy or sell its currency at any other than the arbitrary official value put upon it. But the breakdown of the whole system is now becoming evident even to the “experts.”

Its first effect was to choke and unbalance foreign trade. It produced the so-called “world dollar shortage” which at least one British economist, Roy Harrod, had the courage to call “one of the most brazen pieces of collective effrontery that has ever been uttered.” Even Sir Stafford Cripps eventually profited by the expensive education of events, and slashed the arbitrary value of sterling from $4.03 to $2.80 in September 1949—a step which led to the reversal of the sterling area’s balance of payments.

It was a step imitated by some 30 countries, but it fell short of being the right step—which was to set the markets free. And this is what Canada has now had the courage to take.

Canada’s step has been criticized in some quarters because it would mean a “floating rate” that can move up and down every day in accordance with fluctuations of supply and demand and fluctuations in confidence. But the bureaucrats’ headache is the citizens’ salvation. It is precisely the great advantage of a free rate that it compels the monetary managers to act with prudence and foresight and maintain the integrity of the currency at all times. It is precisely because they know that any lapse in confidence will be reflected immediately in the market quotation that the managers of a free-exchange currency are compelled to act with more responsibility than the managers of a controlled one. Because of the public confidence in Canada’s policy, the quotation of the Canadian dollar on the first day of free markets actually rose from the former fixed “official” rate of 91 American cents to a level of 95 cents.

A floating rate for the Canadian dollar is probably intended to be temporary, but it is a necessary transitional step. We will never emerge from the present world monetary chaos until the leading countries return to a gold standard and adopt the measures to create confidence that the gold standard will be maintained.