Canada Waives the Rules

Good sense sometimes makes the most thundering heresy. Example: Canada's new floating dollar. At its old fixed value of 92.5 U.S. cents, the currency was clearly undervalued; foreign money was pouring into Canada and aggravating an inflationary trend. Yet Canadian officials did not want to try to guess what official price would be right. So they decided last week to let the Canadian dollar sell for an indefinite period at whatever price foreign moneymen would pay (which by week's end was just under 97 U.S. cents). The move followed the example of West Germany, which last fall let the mark's value float for four weeks before it finally boosted the official rate from 25-c- to 27.3-c-.*

Directors of the International Monetary Fund were shocked. Canada, they grumbled, was not playing by I.M.F. rules. Those rules require each country to maintain a fixed value for its currency, and allow change only when a nation's finances get into "fundamental disequilibrium," a stage that Canada had not quite reached. Still, what was to be gained by Canada's waiting for an acute crisis to develop--as the British, French and Germans have done in the past--before making long-overdue rate changes? Although the I.M.F. rules are designed to promote stability in world finance, they have proved to be overly rigid. Genuine stability is achieved when exchange rates reflect real value, and the market may often be the best mechanism for determining that value. If all goes smoothly, Canada's bold step may quicken moves toward a freer, more flexible system of exchange rates throughout the non-Communist world.

Cheapened Standard. Theoretically, the rise in price of Canada's dollar should add to inflation in the U.S., because it will tend to increase the cost of the raw materials that the U.S. buys up North. But producers of Canadian nickel, newsprint and some other exports intend to hold their prices steady for at least the time being in order to please their important U.S. customers. The rise in other materials is expected to be relatively small. U.S. sales to Canada will very probably increase because Canadians will have to put up less of their own currency to buy U.S. goods.

For U.S. citizens, however, Canada's move has one disconcerting note: It underscores the severity of U.S. inflation. From the start of 1969 to the start of 1970, consumer prices rose more in the U.S. (6.5%) than in Canada (4.7%) or in most other industrial countries. The U.S. dollar is the standard of value against which all other currencies are measured. But its purchasing power is shrinking faster than that of other important moneys, which is a major reason why the Canadian dollar, Swiss franc and the Dutch guilder have lately looked "undervalued."

* And Canada's own example in having no fixed exchange rate between September 1950 and May 1962.

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