The war years (1939-45)
Exchange controls were introduced in
Canada through an Order-in-Council passed on
15 September 1939 and took effect the following
day, under the authority of the War Measures Act.70
The Foreign Exchange Control Order established a
legal framework for the control of foreign
exchange transactions, and the Foreign Exchange
Control Board (FECB) began operations on
16 September.71 The Exchange Fund Account was
activated at the same time to hold Canada’s gold
and foreign exchange reserves. The Board was
responsible to the minister of finance, and its
chairman was the Governor of the Bank of
Canada.
Day-to-day operations of the FECB were
carried out mainly by Bank of Canada staff.
The Foreign Exchange Control Order
authorized the FECB to fix, subject to ministerial
approval, the exchange rate of the Canadian dollar
vis-à-vis the U.S. dollar and the pound sterling.
Accordingly, the FECB fixed the Canadian-dollar
value of the U.S. dollar at Can$1.10 (US$0.9091)
Canada under
Fixed Exchange Rates
and Exchange Controls (1939-50)
Bank of Canada, $2, 1937
The 1937 issue differed considerably in design from its 1935 counterpart. The
portrait of King George VI appeared in the centre of all but two denominations.
The colour of the $2 note in this issue was changed to terra cotta from blue to avoid
confusion with the green $1 notes. This was the Bank’s first issue to include French
and English text on the same note.
70. Parliament did not, in fact, have an opportunity to vote on exchange controls until after the war. The Foreign Exchange Control Act received royal
assent on 31 August 1946 and became effective on 1 January 1947. The legislation contained a “sunset” clause, which obliged the government to renew
the controls every two years.
71. Preparations for the imposition of exchange controls in the event of war had begun in secret as early as August 1938. See Towers (1940).
buying and Can$1.11 (US$0.9009) selling. The
pound sterling was fixed at Can$4.43 buying and
Can$4.47 selling.72 These rates were roughly
consistent with market exchange rates immediately
prior to the imposition of controls. Currency rates
on futures contracts of up to 90 days were also
fixed by the FECB. These exchange rates were
maintained for the duration of the war.
To conserve Canada’s foreign exchange and
effectively support the value of the Canadian dollar,
the Board introduced extensive controls. These
controls allowed the Board to regulate both current
and capital account transactions, although most
current account transactions, other than travel, were
treated fairly leniently.73 Permits were required for
all payments by residents to non-residents for
imports of goods and services. Permits were also
required for the purchase of foreign currencies and
foreign securities, the export of funds by travellers,
and to change one’s status from resident to
non-resident. Residents were also required to sell all
foreign exchange receipts to an authorized dealer.
Interbank trading in Canadian dollars ceased.
54 A History of the Canadian Dollar
War savings stamps booklet, 1940
During World War II, citizens supported the war effort by
buying war savings stamps at the post office and at banks. These
stamps were glued into booklets and sent to the government for
redemption in war savings certificates, which bore low interest
and could be cashed in after the war.
72. The spreads for both the U.S. dollar and the pound sterling were narrowed slightly in October 1945 by reducing the selling rate for the U.S. dollar to
Can$1.1050 (US$0.9046) and Can$4.45 for the pound.
73. The Canadian government placed controls on the importation of goods deemed to be non-essential. Such import controls were administered by other
bodies.
Royal Bank of Canada, $5, 1943
In 1944, banks were prohibited from issuing their own
notes. This note is from one of the last issues by a
chartered bank. The Royal Bank's General Manager,
Sydney G. Dobson, appears on the left, and President
Morris W. Wilson on the right.
A History of the Canadian Dollar 55
On 30 April 1940, the Foreign Exchange
Acquisition Order stiffened the controls even
further. Canadian residents, including the Bank of
Canada, were now required to sell (with minor
exceptions) all the foreign exchange they owned to
the FECB.
The imposition of exchange controls
by the Canadian authorities reflected a number of
concerns (Handfield-Jones 1962)
. First, even
though it was expected that Canadian exports to
the United Kingdom would increase, there was a
concern that the Canadian military buildup would
lead to a significant rise in imports from the United
States. Second, under U.S. law at the start of the
war, loans to “belligerent” countries were
forbidden. Hence, U.S. imports had to be paid for
in cash; i.e., U.S. dollars or gold. Moreover, given
British exchange controls, an increase in sterling
assets arising from net Canadian exports to the
sterling area could not be converted into U.S.
dollars. Finally, there was a concern that Canadians
might seek to place funds in a non-belligerent
country and that U.S. residents, who held
considerable Canadian assets, might seek to
repatriate their holdings.
It is interesting to note that while all
foreign currency transactions were subject to
exchange controls, in practice, the controls centred
on transactions involving U.S. dollars. Although
permits were required for sterling transactions,
there were no restrictions (FECB 1946, 19).
Moreover, Canadian residents were not required to
sell sterling receipts to the FECB (Wonnacott 1958,
83). This reflected the buildup of sterling balances
held by the FECB, which could not be converted
into U.S. dollars.74
Canada’s need for controls during World
War II contrasts with its experience during World
War I, when exchange controls were not imposed.
In 1914, Canada’s principal foreign creditor was the
United Kingdom, with the bulk of British claims
on Canada in the form of direct investment or
denominated in sterling. British holdings of U.S.
dollars were also substantial at the outbreak of
World War I.
Consequently, the British authorities
were able to pay for their own U.S. imports,
maintain a stable and convertible currency, and
provide U.S. dollars to Canada in settlement of
Canada’s trade surplus with the United Kingdom.
The situation had changed by 1939. The
United States had become Canada’s most important
source of foreign capital, and there was concern
that neutral U.S. residents would not wish to hold
the securities of a belligerent country. British
holdings of U.S. dollars were also much diminished.
Therefore, Canada could not expect the United
Kingdom to provide U.S. dollars in exchange for
surplus sterling balances, as it had in 1914. Indeed,
the British authorities introduced their own
exchange controls at the outbreak of World War II
(FECB 1946, 9–10).
