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Setting the stage for a return to the gold standard

There was a general presumption that, after the war, the major industrial countries would return to the gold standard. The United States, which was a late entrant into the war and did not experience the same sort of financial or inflationary pressures as the United Kingdom or Canada, returned to its old fixing in terms of gold in June 1919. The United Kingdom controversially followed suit in 1925 at its old pre-war price in terms of gold, equivalent to US$4.8666.57

In Canada, the Finance Act of 1914, which had been adopted as a war measure, was extended in 1919 and revised in 1923. Under the revised act, provision was made for an automatic return to the gold standard after three years unless the government took steps to the contrary.

The revised act also gave the Dominion government greater flexibility to adjust the rate at which banks could obtain funding. However, the Treasury Board, which was responsible for administering the act, did not conduct an active monetary policy.

The Advance Rate remained fixed at 5 per cent, the same level it had been throughout the war. Thus, there appeared to be little overt official effort to tighten monetary policy in anticipation of an eventual return to the gold standard, which would fix the dollar at its pre-war value in terms of gold and at par with its U.S. counterpart.

Despite the apparent lack of action, the money supply did contract significantly during the first half of the 1920s, permitting a return to the gold standard. The maintenance of the Advance Rate at 5 per cent, despite a fall in market interest rates, had deflationary consequences. Moreover, Britain’s repayment of war loans from Canadian banks (which were subsequently discounted under the Finance Act at the special 3.5 per cent rate) and the retirement of the so-called "British Issue” of Dominion notes issued in 1917 against British treasury bills also contributed to the monetary contraction. Expansionary monetary policy in the United States, partly aimed at facilitating the return of European countries to the gold standard, also facilitated Canada’s return to the gold standard on 1 July 1926. However, gold reserves were widely viewed as inadequate to the task.

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Category: 1914-26 | Added by: gogoshvab (2010-02-18)
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