The new exchange rate did not hold for long. Imports from the United States rose sharply, leading to a marked decline in Canada’s holdings of gold and U.S. dollars in the second half of 1946 and through 1947. While Canadian exports to the United Kingdom and other countries remained robust, they were financed largely by Canadian loans. Hence, they did not boost usable reserves.
In November 1947, Canadian authorities reduced travel allowances for Canadians visiting the United States and tightened import controls to restrict the importation of non-essential goods. The provision of U.S. dollars for Canadian direct investment abroad was also virtually suspended. Even with the intensification of exchange controls, Canada’s holdings of gold and U.S. dollars declined to US$501.7 million by the end of 1947. These developments led to considerable criticism of the Canadian government for its 1946 decision to revalue the Canadian dollar.
The situation eased somewhat in 1948. Canada’s trade deficit with the United States narrowed, a sizable U.S.-dollar line of credit was established with the U.S. Export-Import Bank, and Canada’s trade balance with other countries improved (including an increase in actual receipts). In fact, by the end of 1948, Canada’s holdings of gold and U.S. dollars had doubled to US$997.8 million.
Nevertheless, following a major realignment of the pound sterling and most other major European currencies vis-à-vis the U.S. dollar, the Canadian dollar was devalued by approximately 9.1 per cent against its U.S. counterpart on 20 September 1949. The Canadian dollar thus returned to its pre-July 1946 value against the U.S. dollar of Can$1.10 (US$0.9091) buying and Can$1.105 (US$0.9050) selling. The FECB also established new official rates for the pound sterling: Can$3.0725 buying and Can$3.0875 selling.
The main reason cited for the Canadian dollar’s devaluation was the possible effect of the substantial devaluations of other currencies on Canada’s balance-of-payments position. There were also concerns that Canada’s reserves had not recovered sufficiently from their 1947 low(FECB 1949, 7).
However, fast-changing international economic conditions, unleashed by the Korean War, placed the new fixed rate under pressure; this time on the upside. As a consequence, Canadian authorities were once again obliged to reconsider exchange rate policy, ultimately leading to the floating of the Canadian dollar in September 1950, and the lifting of exchange controls late the following year. These issues are explored in "A Floating CanadianDollar.”