Down where the going gets tough

Roderick McQueen,Ian Brown October 9 1978

Down where the going gets tough

Roderick McQueen,Ian Brown October 9 1978

Down where the going gets tough


By Roderick McQueen/Ian Brown

Drooping downward through months of worldwide contempt, unresponsive to central-bank market intervention, growing more sickly through four interest-rate increases, Canada’s dollar has become the invalid among international currencies. Amid mollifying phrases from Ottawa mandarins which mystified money traders the dollar tumbled another 2½ cents during the month of September and was hovering below 85 cents last week. Tt was an unexpected sliue which will add to domestic inflation, making imports and trips abroad more costly, reflecting a thumbs-down view of the world toward Canada’s faltering economy, massive unemployment, high inflation and anemic productivity.

At the centre of the controversy is the federal government, along with everyone’s favorite targets, Finance Minister Jean Chrétien and the Bank of Canada, where p policy on money supply, market intervention and § interest rates is set. The § cause of the recent fall? “

“Neglect by the govern§ ment,” says Dr. B. V. Geslt; trin, vice-president of the F Canadian Imperial Bank ú of Commerce, “benign or malign.” For his part, Chrétien appeared almost indifferent to the dollar’s 45-year low (see box) as he journeyed to Washington last week for talks and a 15-minute speech to the International Monetary Fund in which, amazingly, he barely mentioned the Canadian dollar.

The Diefenbuck and all that

December 1931—Canadian dollar plummets to 80.08 cents from near par after Great Britain goes off gold standard; recovery to par waits for U.S. to go off gold standard in 1933.

September 1939—Foreign Exchange Control Board created to protect wartime currency as dollar pegged at 90.5 cents.

July 1946—Raised to par with U.S. dollar; was frozen at that value in the newly formed International Monetary Fund.

September 1949—Back to the wartime 90.5 with British pound devaluation and a large trade deficit.

September 1950—Swift recovery above U.S. values with the dollar the world’s only free-floating world currency.

August 1957—Strongest since 1933, at $1.05'/2 after $15 billion investment money flows into Canada in six months.

June 1961—Finance Minister Donald Fleming’s budget drives dollar down to 95 cents; demands made for pegging.

May 1962—Diefenbaker government does an about-face, pegs at 92.5.

February 1968—Government tax-bill defeat brings holidaying Prime Minister Pearson back for confidence vote amid suggested dollar crisis.

May 1970—Finance Minister Edgar Benson floats the dollar again; it rises to 95 cents within two weeks.

November 1976—Dollar trades at a premium of $1.03 prior to slide following PQ victory in Quebec.

September 1978—Dollar reaches 84.43.

Others, however, were talking about it. The simple message in the corridors where 3,000 world leaders and bankers met was this: money markets have lost confidence in the Trudeau government’s ability to manage the economy. The dollar had become both symptom and symbol. While the IMF took no official position, a well-connected source confided: “There are people here with question marks all around their heads.” Sources both at the meetings and in Ottawa were saying that IMF auditors would be heading for Canada’s capital later this year to check books and insist on action. Even the Wall Street Journal, not given to hyperbole, said the Trudeau government is “running out of tricks.” Far from the Washington corridors and the 11th floor of the Bank of Canada, where Governor Gerald Bouey reflects upon interest rates, is a grubby room 16 stunted floors above Toronto’s York Street. Here, Barry James, president of Barron Stephens Inc., shouts out a living at the end of a telephone as an independent inter-bank foreign exchange broker, trading about $240 mil-

lion in foreign exchange daily. His gravelly voice blisters the accusation: “The trouble with the Canadian dollar is the confusion of government policy with regards to the proper level for the dollar.” He, along with other street traders, wants the government to do something, anything, to let a probing foreign exchange market know that the dollar cannot be intimidated. Says a New York bank vice-president: “If something is not done and done soon by the Bank of Canada, there is no bottom for the Canadian dollar.”

The view from Paris is equally bleak. Noting what he calls a marked “deinvestment” in Canada, Michael

Younger of A. E. Ames, the largest Canadian brokerage house in France, says certain Canadian economic policies have “left a nasty taste in people’s mouths.” He adds, “Five to 10 years ago people used to look at the long-term potential of Canada. Frankly, they’re bewildered now. They don’t have screaming confidence in us.” At the Paris-based Organization for Economic Co-operation and Development,

the dollar’s fall is carefully described as an “adjustment.” Says an OECD economist: “There’s persistent and irrational gloom about Canada.”

Chrétien’s apparent Washington indifference to the Canadian dollar’s value gave way toward the end of the week to a different stance: a bizarre attack on Opposition leader Joe Clark for causing the dollar’s fall by claiming the federal deficit this year would be $18 billion, one third higher than official estimates. Trudeau, meanwhile, was defending the dollar to a byelection crowd in York-Scarborough. Not the champion of the world, he admitted, but doing better than the French franc and Spanish peseta. The mood of the country as the mini-election took shape seemed shaken, baffled and cynical. An Ottawa lunch-counter operator who pays 17 cents on a U.S. dollar was told his premium was among the highest that patron had seen. “Well,” he matter-of-factly replied, “the Canadian

dollar’s gone down to 83 cents today. It’s soon going to be worth nothing.”

In fact, very little seems capable these days of stopping the plunge. A Bank of Canada announcement Sept. 20 of a $750-million foreign borrowing scarcely caused the dollar to avert its eyes from its steep downward path. August merchandise trade figures released on the last day of September were lower at a $186-million surplus than the market had been led to believe. Earlier in the week, sources within the Bank of Canada had told traders the figure would run to a healthy $300 million. Although traders, brokers, economists and corporate executives alike agree that the Canadian dollar is undervalued at 84 cents or 85 cents and intrinsically worth between 86 cents and 89 cents, the point is by now largely academic. More important is whether the dollar can free itself from the force of its own downward spiral. So far, Chrétien and Bouey have stuck to their belief that a pegged rate for the dollar would be difficult to determine and even more difficult to maintain. The $3 billion from the Bank of Canada’s reserves, which has been used to intervene in the foreign exchange market during 1978’s first eight months, is expected to become $4 billion when September figures are released this month. But that action should not be interpreted as support of

the dollar, they say. Economists agree that if psychological momentum continues to drag the dollar down, the inflationary effect—higher cost of imports and higher wage demands—will be great enough to launch another, perhaps deadly, round of inflation, followed by more devaluation, followed by more inflation. “World experience has shown,” William Mackness, chief economist for Pitfield, Mackay, Ross says, “that once currencies start to spin, they really go.” One method suggested last week to stop the spin, exchange controls, was dismissed immediately by

senior deputy Bank of Canada governor R. W. Lawson. “If otherwise serious and informed people are talking about imposing foreign exchange controls,” he said, “they’ve lost their marbles.”

The Canadian dollar seems to have reached the surreal state where the slightest bad news drives it down and goods news goes disregarded. “The U.S. has a cold, so we must have pneumonia,” says Hugh Benham, research department manager at Winnipeg’s James Richardson and Sons. “Their dollar has been under pressure so ours has had extra pressure. The element of logic has been absent.”

Logic, however, has not prevented some speculators from making a bundle. Tourism, exports and foreign travellers also love the ailing dollar. Remarked a London banker surveying his slightly dowdy downtown Toronto hotel room last week: “I’m not going to complain, it would cost twice as much in London.” Even the recently beleaguered British pound travels further than it once did in Canada with British Columbia in particular noticing the biggest

increase in visitors since 1973. “We’re having a good year, there’s no doubt about it,” says researcher Doug White in the province’s tourist office. Typically, a recent Japan Airlines flight back to Japan with 282 tourists also carried more than 300 five-pound boxes of salmon at $40 per crated memory.

CN Marine ferry operations report Atlantic Canada traffic is back up to record 1975 levels, but it doesn’t appear to be an inflow of Americans with premium-priced dollars. Nova Scotia tourism department director Dan Brennan wonders if the good news about how far the U.S. dollar goes has yet even reached Americans. While the weakened Canadian dollar should have caused a spurt in visitors, the province was forced to cancel U.S. television ads urging viewers to come. “We just can’t afford it anymore,” sighs Brennan.

But all the tourist shopping bargains aren’t in Canada. Montrealer Celia Bussey is among many Quebeckers who still head for the border town of Plattsburg, New York, where goods remain cheap even with devalued Canadian dollars. Smuggling is so common that the last gas station before the border boasts extra washroom bins for old clothes discarded on the return trip. European bargains are less common. Traditional coffee at the corner Paris café costs $2.70, more than double the $1.20 it took before the dollar began to drop in 1976. As the manager of the Canadian Imperial Bank of Commerce branch in Paris says: “Everybody that comes here is screaming about how little the Canadian dollar buys these days.”

Those high costs abroad which keep Canadians home go hand-in-hand, however, with improved export sales. Sales to Britain, for example, are up by 12 per cent in the first six months of 1978 over the previous year. East-coast fisheries are also enjoying a boom. “Devaluation has made our prices more attractive overseas,” says Henry Demone, assistant international trading manager for National Sea Products Ltd. But buying trawlers from West Germany or filleting machines from the U.S. is expensive. “That hurts,” says Demone. Mineral and pulp resources, traditional Maritime exports, are more attractive even with soft world markets.

Canada’s dollar value hits debts dramatically in foreign currencies. Ask Jerry Kay about the Halifax-Dartmouth Bridge Commission’s debt to German and Swiss banks and you’ll get an exasperated sigh. The commission’s general manager has watched the foreign debt soar from $39.4 million when the loans were made in 1969 and 1973 to $92 million today. The commission has already paid $34 million in interest without touching the principal.

With the many signals around, as the month of October begins, Chrétien may have little alternative but to do nothing while trying to convince the rest of the world that the bottom has not fallen out of Canada’s basket. If the dollar drops into the netherworld below 80 cents, there will come a point, Royal Bank senior economist Robert Baguley points out, “when it is possible for a Japanese businessman to put a Thunderbird in his driveway for less than a Datsun.” The private sector is keen for a show of strength, however futile it might prove: economists such as Sid Dolgoy, senior economist at The Toronto-Dominion Bank, lean toward “more of the same, but with more resolve.” Regardless of resolve, the outlook for the battered buck is bad: estimates for the next three months range from below 80 cents to 88 cents. Next year, says the Commerce’s Gestrin, “it may rise to 87 or 88 cents, but for the next 12 months at least there will be very little to write home about.” And then only if you can afford the