The gold standard and the Canadian dollar

What is a gold standard?

A gold standard is a money system where the unit of currency is a fixed amount of gold, or is kept at the value of a fixed amount of gold. The Bank of Canada Museum puts it simply: in an ideal gold standard, every piece of paper money stands for an amount of gold held by whoever issued it.

In practice, that meant you could trade your paper money for gold at a set rate. This is called "convertibility." It tied the paper in your wallet to real gold held somewhere in a vault.

Britain leads the way

Britain was the first country to put a gold standard into operation. Long before that, Isaac Newton ran the Royal Mint. He became Warden of the Royal Mint in 1696 and Master of the Mint in 1699. His report of September 21, 1717 led to the gold guinea being set at 21 shillings.

A century later, the Coinage Act of 1816 made gold the only legal standard of value in Britain. Silver coins became token money, legal tender only for purchases up to 40 shillings. The gold sovereign was brought back in 1817, and by 1821 the gold standard was fully in place. Germany, France and the United States all moved to gold in the 1870s.

Canada gets its own dollar

Before the 1850s, the Province of Canada kept its accounts in pounds, shillings and pence, while British, Spanish and US coins all changed hands. A compromise Currency Act was passed in 1853 and came into force on August 1, 1854. It allowed both pounds and dollars in the Province of Canada's accounts.

From that day until 1914, Canada was on a gold standard the whole time. The Canadian dollar was valued at par with the US dollar, and a British gold sovereign was worth exactly $4.8666. Paper money could be exchanged for gold without restriction, and gold could move in and out of the country freely.

The dollar soon won out. A revised Currency Act said that from December 31, 1857, all of the province's accounts would be kept in dollars. In 1858, the first silver and bronze coins in cents with the word "Canada" on them were issued.

Dominion notes

After Confederation, the new Dominion took over the provincial paper money and renamed it "Dominion notes." These notes were only partly backed by gold. The first $5 million had 20 per cent gold backing, and the next $3 million had 25 per cent. By 1913, the first $30 million needed 25 per cent backing, and every note above that had to be fully backed by gold.

Nova Scotia kept its own currency until April 1871, when the Uniform Currency Act brought the whole country onto one system of dollars, cents and mills.

Wars, the Depression and a new central bank

The First World War broke the system. On August 10, 1914, the government stopped swapping Dominion notes for gold. The Finance Act followed on August 22, 1914, and let the government issue new Dominion notes with no gold behind them to pay for the war.

Canada went back to gold on July 1, 1926, but it didn't last. Here's how the exit unfolded:

• 1929: in the Bank of Canada's words, Canada went off the gold standard "in effect, if not in form."
• October 31, 1931: the export of gold was officially banned.
• April 10, 1933: an order officially suspended the swapping of Dominion notes for gold.

The Depression also pushed Canada to create a central bank. The Bank of Canada Act received royal assent on July 3, 1934, and the Bank of Canada opened its doors in March 1935. It was privately owned at first and became publicly owned in 1938.

Bretton Woods: gold at $35

When the Second World War began, Canada set up exchange controls. In September 1939, the US dollar was fixed at $1.10 Canadian, which made a Canadian dollar worth about 90.9 US cents.

In July 1944, delegates from 44 nations met at Bretton Woods, New Hampshire, to build a new system. Countries agreed to keep their currencies fixed to the US dollar, within a 1 per cent band, and the US dollar was fixed to gold at $35 an ounce. The meeting also laid the plans for the International Monetary Fund (IMF), which came into being in December 1945.

Canada's dollar moved around within that system. It was raised by about 9 per cent on July 5, 1946, and lowered again on September 20, 1949, back to about 90.9 US cents. That 1949 value was the par value Canada registered with the IMF.

Canada lets its dollar float

Canada went its own way early. On September 30, 1950, Finance Minister Douglas Abbott announced that Canada would stop fixing its exchange rate for the time being. Officials worried that money pouring into the country would push up inflation if they tried to hold a fixed rate.

The 1970 float came when strong demand for Canada's resources and money flowing in kept pushing the dollar up, and the government wanted to protect its fight against inflation. Finance Minister Edgar Benson made the announcement.

A year later, the whole Bretton Woods system cracked. On August 15, 1971, US President Richard Nixon closed the "gold window": foreign governments could no longer exchange their US dollars for gold. By 1973, every major currency was floating. Since then, the market has set the price of gold, and you can follow that story on our gold and silver price history page.

Canada's gold today

During the war years, Canada built up its reserves: its holdings of gold and US dollars grew from about US$188 million at the end of 1941 to about US$1.5 billion by the end of 1945. Today, the picture is very different.

In February 2016, the federal government sold 21,851 ounces of gold coins. When the month ended, Canada's official gold holdings stood at just 77 ounces.

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