By late 1944, pressure on Canada’s foreign exchange reserves had eased dramatically. The Hyde Park Agreement of April 1941, the entry of the United States into the war in December 1941, as well as major U.S. infrastructure projects on Canadian soil (such as the construction of the Alaska Highway) contributed to a rebuilding of Canada’s foreign exchange reserves. There were also significant capital inflows into Canada, partly from Canadian residents repatriating funds invested in U.S. securities, but also from U.S. residents buying Canadian Victory Bonds. U.S. direct investment in Canada also increased.
The Hyde Park Agreement
The Hyde Park Agreement permitted Canada and the United States to specialize in the production of war material. Canada concentrated on the production of certain types of munitions, aluminum, and ships required by the United States (FECB 1946, 26). This agreement between Mackenzie King and Roosevelt was drafted, in longhand, by James Coyne, later to become Governor of the Bank of Canada, but who was then seconded to Clifford Clark, Deputy Minister of Finance, as Financial Attaché at the Canadian Embassy in Washington D.C.
The rebuilding of reserves allowed a slight easing of exchange controls in 1944 to facilitate travel to the United States and to allow Canadian firms to extend their foreign business activities. By the end of 1945, Canada’s holdings of gold and U.S. dollars had increased to US$1,508 million from only US$187.6 million at the end of 1941.
With expectations of continued capital inflows, the Canadian dollar was revalued upwards by roughly 9 per cent against both the U.S. dollar and the pound sterling on 5 July 1946. The new rates were: Can$1.000 buying, Can$1.005 (US$0.9950), selling for the U.S. dollar; and Can$4.02 buying and Can$4.04 selling for the pound sterling. Interestingly, the rationale for the revaluation related more to dampening inflationary pressures emanating from the United States than to the buildup of reserves or to Canada’s balanceof-payments situation. In a statement to the House of Commons, the minister of finance noted that the revaluation of the Canadian dollar was one of the measures taken to maintain order, stability, and independence in Canada’s economic and financial affairs. He added that
these measures we feel will go a long way toward insulating Canada against unfavourable external conditions and easing the inflationary pressures which are now so strong.