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(Adrian Wyld)
(Adrian Wyld)

Globe Essay

Putting to rest a too vigorous bird Add to ...

Every institution has its orthodoxies. These are the mostly unwritten rules that no one from within challenges without risking marginalization or outright ostracism. To be a member of the club is to acquiesce.

At the Bank of Canada, arguably the most important player in the Canadian economy, there is only one orthodoxy more inviolate than inflation targeting - though this has been the central bank's only official objective since 1991. No, besides keeping the annual inflation rate between 1 per cent and 3 per cent, those who toil in the glass house that is the bank's Ottawa headquarters accept as holy creed the existence of a separate Canadian currency.

This goes far beyond any desire among bank staff to preserve their own jobs. It is partly the result of a cultural bias, since Canada was the first major country to adopt a floating exchange rate in 1950 and, except for eight years after 1962 when the loonie was pegged to the U.S. dollar, our currency has navigated countless peaks and valleys, to the delight and horror of cross-border shoppers, snowbirds, manufacturers and speculators. Managing monetary policy in a floating-rate regime is what the Bank of Canada knows best.

THE FLOATING HABIT

It is also what the bank's well regarded research staff believes to be in the best interest of the Canadian economy. By letting its dollar float, the bank reasons, Canada can adjust more quickly and effectively to domestic and global economic shocks than it could if we implemented a fixed exchange rate, embraced a common North American currency or simply adopted the U.S. dollar as this country's legal tender.

The central bank believes that the Canadian and U.S. economies are just too different to warrant a single currency and monetary policy. We're net exporters of natural resources; they're net importers of the Earth's God-given abundances. Hence, when commodity prices crater - as they did during the 1997-1998 Asian financial crisis or at the outset of the most recent recession - so does the Canadian dollar.

The loonie's collapse a decade ago was hailed by then Bank of Canada governor Gordon Thiessen as proof of the benefits of a floating rate. The decline buffered the blow delivered to the economy by low resource prices by helping "Canadian manufacturing and other non-commodity sectors to increase their exports to the United States," he said in a 2000 speech. "In this way, the impact of falling employment and incomes in our primary sector because of lower commodity prices was largely offset by greater expansion in other sectors."

POLITIICAL NO-NO

Mr. Thiessen's speech did not come out of the blue. At the time, economists here were embroiled in a heated debate about the pros and cons of North American monetary union. NAMU, as it was dubbed, was seen as the next logical step in the continuing integration of the Canadian, U.S. and Mexican economies, after the 1994 ratification of the North American free-trade agreement. Talk of a currency union on this continent was also spurred by its realization in Europe in 1999. If countries as disparate as France, Finland, Italy and Ireland could do it, why couldn't two countries as economically and culturally integrated as Canada and the U.S?

It soon became clear, however, that NAMU was a political no-no. Canadian economic nationalists equated common currency with a loss of sovereignty, just as they had fought the Canada-U.S. free-trade Agreement, saying it would mark the end of public health care here. Besides, it suited the Chrétien government to have a low loonie, to take the edge off its tight fiscal policy and create manufacturing jobs. Hence, as the Canadian dollar dug a historic trough, hitting 61.75 cents (U.S.) in 2002, Ontario was on its way to surpassing Michigan in auto production.

If the past decade has taught us anything, though, it is that Canada enjoys all the inconveniences of a floating exchange rate and independent monetary policy, with precious few of the benefits. The protracted low-dollar period wrought an unprecedented widening of the gap between Canadian and U.S. productivity levels, and has left our economy (outside the resource sector) painfully uncompetitive as our currency nears parity with the U.S. dollar.

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