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May 2lu 1951


Governor Eccles


Arthur W# Marget


In accordance with
your request, there is
appended a draft letter
to Senator Capehart*



Message delivered by.

F* R . 4 6 8
Federal Reserve Bank of St. Louis

May 24, 1951.

Honorable Homer E. Capehart,
United States Senate,
Washington 25, D. C.
Dear Senator;
The question which you put to me, as I understand it is whether
there is any truth to the suggestion that the Canadian dollar is at its
present level, in terms of foreign exchange, as a result of operations by
agencies of the United States Government*
I am able to state categorically that there is no truth whatever in such a suggestion.
The decision to abandon the old par of approximately ninety
cents (U.S.) for the Canadian dollar was taken by the Canadian Government
after consultation with the International Monetary Fund, whose rules require that any member proposing a change in exchange rates must submit
such a proposal to the Fund before the action is taken by the country
concerned. The United States Government is of course a member of the
International i<ionetary Fund, and its representative in that organization
participated in the discussion which preceded Canada's action in abandoning the old par. But once the decision was taken, the United States
Government and its agencies have engaged in no operations of any kind designed to affect the foreign exchange value of the Canadian dollar.
As you know, the Canadian Government, in abandoning the old par,
did not proceed immediately to establish a new par. Instead, it proposed
to test the strength of the Canadian dollar by allowing market forces to
operate upon its price in terms of foreign exchange.
This does not mean, of course, that Canada has abandoned foreign
exchange control: although there are no restrictions on current:trade,
other transactions, including capital movements, are subject to regulation.
But it does mean that the price,, in Canadian dollars, at wnich the Canadian
authorities will sell foreign exchange is not fixed, in the way it would be
if a new par (of, say $1 Canadian = fcl U. S.) had been declared. Instead,
the Canadian authorities, with due regard to the desirability of avoiding
extreme day-to-day fluctuations in the foreign exchange value of the Canadian
dollar, may sell foreign exchange at a price which, in their best judgment,

Honorable Homer E. Capehart


is consistent with the fundamental market forces of supply and demand.
It follows that, while the Canadian dollar has remained stable, de facto,
within a range of around 94 to 95 cents (D.S») to the Canadian dollar, it
could, in principle, fall below that rate or rise above it. Which of
these two things will happen will depend on the strength of the Canadian
foreign exchange position. I can assure you again that the current foreign
exchange value of the Canadian dollar is not the result of any operation by
the U. S. Government or any of its agencies.
Sincerely yours,

M. S. Eccles.