Despite mounting evidence that a major
economic contraction was under way following the
stock market crash in October 1929, the federal
government took little in the way of monetary
action to support the economy.61 Admittedly, the
scope for policy action was constrained, since
advances under the Finance Act were made at
the initiative of banks, and there was no money
market. Also, Canada was, at least notionally, still
on the gold standard. Nonetheless, the government
set the Advance Rate, and chose to hold it
unchanged at 4.5 per cent from September 1928
to October 1931. As a result, questions were
widely voiced regarding Treasury Board officials’
understanding of monetary issues.
In his 1933 book on central banking in
Canada, James Creighton argued that J. C. Saunders,
Deputy Minister of Finance during the 1920s and
ex officio Secretary of the Treasury Board, which
administered the Finance Act on behalf of the
Minister of Finance, was not competent in
monetary matters. Creighton noted that Saunders
and other deputy ministers had “neither an
academic training in economics nor practical
experience in banking.” Moreover, the position of
deputy minister was left vacant after Saunders’
death for an extended and critical period—
April 1930 to November 1932—leaving a serious
policy vacuum (Creighton 1933, 86–90).
61. At the height of the Depression in 1933, real output in Canada had fallen by roughly 28 per cent from its 1929 level, while prices, as measured by the
GDP deflator, had declined by about 15 per cent.
Canadian exports had fallen by almost two-thirds from their 1928 peak.
Bank of Canada, $25, 1935
This note is the first commemorative note issued
by the Bank of Canada. It was issued on
11 May 1935 to mark the 25th anniversary of the
reign of King George V.
A History of the Canadian Dollar 45
Coincidentally, Benjamin Strong, Governor
of the New York Federal Reserve since its
establishment in 1914 and dominant personality in
the Federal Reserve system during its formative
years, died in October 1928. His death also left a
policy vacuum in the United States at a critical time.
There is considerable controversy about
Strong’s policies and what would have happened
had he lived. Some argue that his expansionary
policies during the mid-1920s encouraged the
speculative excesses that led to the stock market
crash. Others contend that, had he lived, Strong
would have moved quickly to moderate the effects
of the Depression (Roberts 2000). Nonetheless, the
Federal Reserve Bank of New York acted more
quickly and aggressively to cut interest rates than
did the Canadian government. The Fed’s Discount
Rate, the equivalent of the Canadian Advance Rate,
was cut from 6 per cent at the time of the stock
market crash in 1929 to 2 per cent by December
1930 (Chart C2 in Appendix C).62
At the same time that the Canadian
government was doing nothing on the monetary
front, the chartered banks were repaying their
borrowings from the government under the
Finance
Act.63 The resulting monetary contraction
exacerbated the economic downturn. The banks
became increasingly cautious about their own
lending activities as the economic environment
deteriorated. Banks may have also repaid their
borrowings under the Finance Act in response to
earlier criticism for having borrowed so extensively
prior to the stock market crash (Fullerton 1986, 36).
While the extent of the economic downturn in Canada was undoubtedly made worse by
these monetary developments, the monetary
contraction helped to strengthen the Canadian
dollar, which reached US$0.90 by the spring
of 1932.
The government finally reduced the
Advance Rate to 3 per cent in October 1931 and
to 2.5 per cent in May 1933. (See Chart C2 in
Appendix C.)64 In the autumn of 1932, it also used
moral suasion to force the banks to borrow under
the Finance Act and reflate the economy
(Bryce 1986, 132). This easing in monetary policy
led to some temporary weakness in the Canadian
dollar, which briefly fell as low as US$0.80. The
weakness was short-lived, however. Following
the U.S. decision to prohibit the export of
gold in April 1933 and similar efforts in the United
States to reflate, the Canadian dollar began
to strengthen.65 The Canadian government’s
decision in 1934 to expand the amount of Dominion
62. The Discount Rate at other Federal Reserve Banks was typically higher than that of the Federal Reserve of New York through the 1930s.
63. Advances under the Finance Act, which had peaked at $112.9 million in November-December 1929, fell to nil by the spring of 1931
(Macmillan Report 1933).
64. The Advance Rate was temporarily increased to 3.5 per cent from May 1932 to May 1933. However, special rates of 2.5 to 3 per cent were available
on advances secured by certain securities.
65. The U.S. government subsequently re-fixed the U.S. dollar on 31 January 1934, such that one ounce of gold was worth US$35, compared with the
pre-1933 price of US$20.67.
46 A History of the Canadian Dollar
“Rapidly recovering.”
Editorial cartoon by Arthur Racey, Montreal Star, October 1932
A History of the Canadian Dollar 47
notes in circulation by reducing their gold backing
to 25 per cent did not have much impact on the
Canadian dollar. In the economic circumstances of
the time, and given similar developments in the
United States, this move was viewed as appropriate
and elicited little market reaction (Bryce 1986, 143).
The Canadian dollar returned to rough parity
with its U.S. counterpart by 1934 (Chart 3) and, at
times, even traded at a small premium. With the
U.S. dollar depreciating against gold and the pound
sterling, the Canadian dollar returned to its old
parity with sterling.
Establishment of a central bank
Not surprisingly, as the 1930s progressed
with little sign that the Depression was ending,
pressure began to mount on the government to do
something. In addition to concerns about the
adequacy of the Finance Act, there was also
widespread public distrust of the banking system,
largely because of the high cost and low availability
of credit. Farmers, especially those in western
Canada, who were suffering from a sharp fall in
both crop yields and prices, were particularly
critical of banks and consequently very supportive
of the formation of a central bank. They hoped
that a central bank would be a source of steady and
cheap credit. With effective nominal interest
rates on farm loans in excess of 7 per cent, real
interest rates were very high—about 17 per cent
in 1931 and 1932, owing to sharply declining
consumer prices. But interest rates were high for
everyone because of the high Advance Rate.
The traditional rate for a prime commercial loan
was 6 per cent, while the standard deposit rate
was 3 per cent, until the latter was reduced to
2.5 per cent in 1933 with the approval of the
federal government (MacIntosh 1991, 73–75).
In July 1933, the government set up a
commission with a mandate to study the
functioning of the Finance Act and to make
“a careful consideration of the advisability
of establishing in Canada a Central Banking
Institution .
. . .” (Macmillan Report 1933, 5).66
Lord Macmillan, a famous British jurist and known
supporter of a central bank, was chosen by Prime
Minister Bennett to chair the commission.
The other members were Sir Charles Addis, a
former director of the Bank of England;
Sir William T. White, the former wartime Canadian
Finance Minister and banker; John Brownlee,
Premier of Alberta; and Beaudry Leman, a
Montréal banker.67
66. Bordo and Redish (1986) argue that the establishment of the Bank of Canada had more to do with political than with economic imperatives. Watts
(1993, 9), citing a 7 December 1933 speech by Prime Minister Bennett in London, Ontario, argues that the rationale for establishing a central bank was
largely external. In the speech, Bennett stated that for Canada to be “financially independent,” it needed a central bank for “determining balances, or
settling international accounts.” See also MacIntosh (1991).
67. From 1929 to 1931, Lord Macmillan had chaired a British commission called the Committee on Finance and Industry, which examined banking,
finance, and credit developments in the United Kingdom. Sir Charles Addis was Chairman of the Hong Kong and Shanghai Banking Corporation
and former Vice-Chairman of the Bank for International Settlements. Sir William White was Vice-Chairman of the Canadian Bank of Commerce.
Mr. Beaudry Leman was General Manager of the Banque Canadienne Nationale and former president of the Canadian Bankers Association
(Stokes 1939).
48 A History of the Canadian Dollar
Public hearings began on 8 August 1933,
and the final report was presented to the government
less than seven weeks later on 28 September. While
the commission voted only narrowly in favour of
the establishment of a central bank, its conclusion
was never really in doubt. The two British
members of the committee, joined by Brownlee,
voted in favour of a central bank, a position
supported by both the Conservative government
and the Liberal opposition.
The Canadian bankers on the committee
opposed. White dissented from the majority on the
grounds that it was unwise to establish a central
bank in the prevailing uncertain economic
environment. In his view, a newly established and
untried central bank might hinder the government.
Favouring a return to the gold standard,
White contended that Canada’s main problem was
excessive debt (Macmillan Report 1933, 89).
Leman shared this view and also believed that
the establishment of a central bank raised
constitutional issues that needed exploring
(Macmillan Report 1933, 95).
In general, Canadian banks opposed the
formation of a central bank. Reasons cited included
concerns about the availability of central banking
expertise in Canada, the absence of a Canadian
money market, the ineffectiveness of the Federal
Reserve in countering the Depression in the
United States, and the long-time stability of the
Canadian banking system. Banks were also
unanimously concerned about a reduction in their
Macmillan Report, cover, 1933
The Macmillan Report is a seminal document in the history
of the Bank of Canada. It records the recommendations
of the Royal Commission, chaired by Lord Macmillan,
that considered the feasibility of establishing a central
bank in Canada.
profits associated with the loss of their note-issuing
privileges (MacIntosh 1991, 76).
The Bank of Canada Act received royal
assent on 3 July 1934,
and the central bank
officially started operations on 11 March 1935.68
Graham Towers, who had been assistant general
manager of the Royal Bank, became the central
bank’s first Governor. To provide some practical
central banking experience, J. A. C. Osborne,
former secretary of the Bank of England, was
made deputy governor.
The Dominion Notes Act and the Finance
Act were also repealed on 11 March. Dominion
notes were quickly replaced by new Bank of Canada
notes. A revised Bank Act governing the operations
of the chartered banks also took effect in 1934.
Revisions to this act initiated a gradual phaseout of private bank notes in favour of Bank of
Canada notes.
With the conduct of monetary policy now
in the hands of the Bank of Canada, a dedicated
monetary institution, there were greater prospects
for a more activist monetary policy. However, the
68. The Bank of Canada, like most central banks of the time, was initially privately owned. Bank of Canada shares had to be widely held; no individual
could own more than 50 shares. In 1936, following a Liberal victory in the election of 1935, Mackenzie King’s government took control of the Bank
through the acquisition of a second issue of shares and subsequently nationalized it in 1938.
Bank of Canada, share certificate, 1935
The Bank of Canada was established as a widely held,
privately owned institution, and shares with a par value of
$50 were sold to the general public on 17 September 1934;
$12.50 payable on application, with the balance due on
2 January 1935. Following a change of government, the
Bank was fully nationalized by 1938.
Bank of Canada, $5, 1935 series
These notes were part of the first series issued by the new
central bank. It was the only series to feature separate English
and French notes. A portrait of Edward, Prince of Wales,
appears on the left and the official seal of the Bank of Canada
is on the right.
A History of the Canadian Dollar 49
50 A History of the Canadian Dollar
Bank of Canada balance sheet
The Bank of Canada’s first balance sheet, 31 December 1935
Bank maintained the Bank Rate (which was equivalent to the Advance Rate under the Finance Act)
at the same 2.50 per cent rate that it had inherited.
It was not until February 1943, in the midst of the
war,
that the Bank Rate was cut (Chart C2 in
Appendix C).
Another important piece of legislation was
the Exchange Fund Act, which received royal assent
on 5 July 1935. The primary purpose of the
act was to provide a fund that could be used to
“aid in the control and protection of the external
value of the Canadian monetary unit” (Statutes of
Canada 1935). The resources of the Exchange
Fund came from the profits associated with the
revaluation of the Bank of Canada’s gold holdings
from the old statutory price of Can$20.67
per ounce to the prevailing world market price of
US$35 per ounce.69 Although the Exchange Fund
Act was passed in 1935, the section of the act
dealing with the use of the fund to protect the value
of the Canadian dollar was not put into effect until
15 September 1939, following Canada’s entry into
World War II.
In any event, an Exchange Fund Account
was not required to stabilize the Canadian dollar
during the mid-1930s. With the currency trading in
a relatively narrow range around parity with its U.S.
counterpart, little intervention by the Bank of
Canada was required.
By late 1938, as the international political
climate deteriorated, the Canadian dollar began to
slip, falling to a small discount of roughly 1 per
cent against the U.S. dollar. The decline was modest,
however, compared with that of the pound sterling,
which fell by roughly 6 per cent in the second half
of 1938, reflecting a considerable shift of funds out
of the United Kingdom (Bank of Canada Annual
Report 1939, 13).
After several months of relative stability,
the Canadian dollar came under renewed, and this
time significant, pressure in the last days of August
1939, as world tensions increased and funds moved
to the safety of the United States. The Canadian
dollar fell roughly 6 per cent vis-à-vis the U.S. dollar
in the two weeks prior to Canada’s declaration of
war with Germany on 10 September 1939, and
by another 3 per cent by the time the government
imposed foreign exchange controls in
mid-September (Bank of Canada Annual Report
1940, 12). The pound sterling fell even more
sharply, declining from US$4.86 to US$4.06, a
depreciation of roughly 14 per cent, before the
imposition of exchange controls in the United
Kingdom in early September.
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