Towards North American Monetary Union: The Politics and History of Canada's Exchange Rate Regime.
This book earned its author, Eric Helleiner of the University of Waterloo, the Donner Prize for the best book on Canadian public policy published in 2006. Its concerns are the reasons for Canada's exchange rate regime choices, from the birth of the Canadian dollar in the 1850s to discussions of North American Monetary Union (or NAMU, as the inelegant acronym runs) over the turn of the 21st century. The discussion is of particular interest because the Canadian dollar floated for all but three periods totalling less than twenty-two years in the period since 1914.
After a brief introduction, the book begins with four historical chapters covering the birth and early gold-standard life of the Canadian dollar to 1914; the predominantly floating dollar of the World War I and the interwar periods; the war-time peg and brief commitment to Bretton Woods before the floating rate of 1950-62; and the further brief peg of 1962-70 before the resumption of the floating rate with which we still live. One could also divide the history into two longer periods of roughly eighty and seventy years each, when economists were not at first but then became extensively involved in the discussion and implementation of policy and, a point not pushed by Helleiner, Canadian economists took leading roles in the discussion of international monetary affairs. There then follow four chapters on the monetary union discussions: those at the time of the free trade discussions; the end-of-century neoliberal case for monetary union and its often neoliberal critics; American politics and the Canadian debate; and the peculiar position of Quebec sovereigntists in the discussions. The book concludes by setting Canadian experience up against the concerns of political science explanations for the adoption of exchange rate regimes.
The quality of the historical chapters is generally high. However, the pre-1914 chapter has in places the almost antiquarian air common to many currency histories. This antiquarian air is probably heightened by a discussion of how the pre-1914 gold standard supposedly worked that almost completely ignores the literature on Canada pioneered by Jacob Viner. The same problem exists with the chapter's history of monetary thought, where Helleiner's generalization that "few economists of that era took seriously the idea that the government could play an active role in promoting macroeconomic outcomes" (p. 36) files in the face of what we know about the views of the intellectual leaders of the profession--Alfred Marshall, F.Y. Edgeworth, Irving Fisher and Knut Wicksell--as elegantly set out by one of the active participants in the monetary union discussions, David Laidler in The Golden Age of the Quantity Theory: The Development of Neoclassical Monetary Economics, 1870-1914 (New York: P. Allan, 1991). Once into the interwar period, the historical discussion on both levels improves. There are some unnecessary mare's nests raised over the discussions leading up to Bretton Woods, in particular of official Canadian reactions to John Henry Williams's key currency proposals of July 1943--a nest that would not have existed if the author had remembered that the Canadian proposals for the post-war monetary system, called 'off White' by Keynes, were developed before Williams's proposals were published and were known to the British and Americans the previous month. There is also a bit of heavy weather made over the role of exchange controls as a central feature of the original Bretton Woods regime, which ignores the fact that Keynes had recognized before the war that an adjustable peg exchange rate system logically entailed them.
The message that emerges from the discussion of the period after the collapse of the interwar gold standard is that the major considerations supporting the preference for floating exchange rates were threefold. First, an exchange rate floated without substantial official intervention depoliticized an issue that was potentially very controversial, given the differential regional effects of exchange rate changes. Second, if the exchange rate floated, it enhanced Canadian monetary autonomy. Third, if the exchange rate floated, it could assist in the adjustment of international disequilibria. With the experience of subsequent periods of pegged exchange rates came two additional arguments for flexibility. With flexible exchange rates one could remove controls on capital movements, as happened in 1951. As well, exchange rate flexibility removed the need, obvious in the 1960s as the United States attempted to control outward capital movements to shore up the dollar, for Canada to make commitments as to reserve levels and hence domestic monetary policy to gain exemption from the American controls. But autonomy in monetary policy could also mean the freedom to make mistakes, as both the deflationary experience of 1958-62 and the excessively inflationary early 1970s illustrated.
These influences from the past served to colour the discussion of monetary union after 1985. Neoliberal supporters of monetary union drew negative lessons from the past experience with monetary autonomy, which they were also prepared to argue made less sense in the changed Canadian economy of the later 20th century. However, as Helleiner points out, the neoliberals were not all on one side in this discussion: there were powerful reiterations of the case for policy autonomy and the role of the exchange rate changes in reducing international economic disequilibria. The debates made for strange bedfellows and different alignments to those that characterized movement towards monetary unification in Europe, where the social democratic left had been as strong supporters of monetary union as the Canadian left had been opponents. Complicating the picture as well were the views of Quebec sovereigntists, who had put the issue of monetary union on the table well before the free trade discussions and who had no problem with the idea, which they found convenient, given their rejection from the outset of a separate currency for an independent Quebec. Helleiner is very good in sorting his way through these discussions, as well as on the tangled issue of governance within a monetary union, given the structure of the Federal Reserve System. A sole reappearing muddle (pp. 43, 172, 198) is that, from the standpoint of multinational firms, "the impact of exchange fluctuations was easily offset through intra-firm transfers of funds" (p. 43). One could see the point for Canada if one was thinking of a small open economy where the prices of tradable goods were set abroad, where there were no tax authorities interested in changes in transfer prices as they affected profits and minimal domestic wages or non-tradable goods costs. Otherwise, exchange rate changes would affect profitability and production decisions.
Altogether, the interested reader will find in this volume a fascinating and remarkably thorough discussion of Canada's exchange rate history--a history that suggests that the prospects for monetary union, for some time yet, are remarkably slim.
Donald E. Moggridge is Professor of Economics at the University of Toronto.
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|Author:||Moggridge, Donald E.|
|Publication:||Canadian Public Administration|
|Date:||Sep 22, 2007|
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