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. 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. 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) 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.
(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.)
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. 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.
(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.)
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. 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. This reflected the buildup of sterling balances held by the FECB, which could not be converted into U.S. dollars.
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).