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December 11, 2015

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Randy McDonald shared the socialist beer article on the Facebook Alternate History group, I wonder if that caused the spike in traffic. That being said, it brought me here, and seeing that Doug M. is a frequent commenter sealed the deal.

Back on topic, at least in the case of Newfoundland their currency was not pegged to the British sterling, eh?

Newfoundland used its own dollar rather than the US dollar though, but yes the devaluation of the US dollar would have been mirrored somewhat I believe in Newfoundland as the Newfoundland dollar was pegged at parity with the Canadian dollar in 1895 and the Canadian dollar was taken off of the gold standard in 1933 just around the time the US devalued its dollar.

You are right that I oversimplified, of course. I have taken your point and corrected "used the dollar" to "pegged one-to-one."

But this is a case where my oversimplification captures the reality. With two brief exceptions during WW1 and again in 1931-33, the C-dollar was effectively the same as a U.S. dollar.

In 1931, Canada went off gold (before the U.S., in fact) which led to a temporary depreciation of the C-dollar. When the U.S. devalued in March 1933, the Canadians re-pegged to the U.S. dollar. (The government had some trouble doing so at first; in 1934 the C-dollar briefly overshot the peg to reach US$1.03.) The subsequent decline in the U.S. dollar gave a fillip to the Canadian economy; even more so in export-dependent Newfoundland.

In other words, the U.S. devaluation wasn't "mirrored somewhat" in Newfoundland; it was followed one-to-one!

Of course, Newfoundland would have done absolutely fine had it had its own freely-floating dollar and been willing to let it fall.

A nice short history is here: http://www.bankofcanada.ca/wp-content/uploads/2010/07/dollar_book.pdf

Michel: I shudder to think what would have happened had Newfoundland pegged to the pound. Yes, the U.K. floated in 1931 ... but that was clearly not enough for Newfoundland. It needed the extra impulse from the depreciation in 1934-35.

Noel,

yes, that is a nice short history (with excellent graphs and images)!

I guess it would be even more true to say that the US devaluation actually followed on the Canadian/Newfie devaluation one-to-one.

I'm not so sure if there would have been a problem with Newfoundland/Canada pegging to the pound. After all historically it was pegged to the pound through the Gold Standard at a rate of £1 = C$4.8666 until the British came off the Gold Standard in September 1931. Canada then practically abandoned the Gold Standard in October 1931 when it banned gold exports (my mistake, I had thought it was 1933, but that was when it officially suspended the redemption of notes into gold). As a result the Canadians and Newfies devalued briefly before the US, which may well be why Newfoundland did well since for all practical purposes it obtained the freely-floating dollar in 1931, a full 3 years before the US devaluation.

Hmmm.....are we really sure it is the US devaluation of 1934-1935 which spurred the Newfoundland recovery in exports? It would seem to me that based the theory behind freely floating exchange rates, it would have been the 1931 devaluation of the Canadian dollar (with a lag time effect of a few years) that eventually helped spur the increase in Newfoundland exports of iron, especially as the exports of Newfoundland's main product (fish) declined in the early 1930s in response to two events (as outlined here on page 6 (p 57 in the document): http://www.international-economy.com/TIE_Su03_Hale.pdf ):

1. the devaluation of the currencies of other fish-exporting countries while Newfoundland remained pegged to the Canadian dollar (which now recovering to parity with the US dollar and said recovery was probably a hinderance to stimulating more Canadian and Newfoundlander exports). In fact in response to this there were proposals to peg the Newfie currency to the pound because the pound had been devalued in 1931.

2. the adoption by Norway and Iceland (the other main competing fish exporters) of sending their fish to market via steamer rather than sailing vessel. This allowed them to give a more fixed date for the arrival of the cargo (as opposed to the sailing vessel where there was much more uncertainty over the arrival time). Coupled to that was the insurance rates for sailing vessels being enormous compared to the insurance rates for steamers which further reduced the competitiveness of Newfoundlander fish exports.


I wouldn't be surprised if the overall recovery in exports by the mid- to late 1930s had to do with a combination of the eventual adoption of steamers to export fish and other cargo plus the Canadian devaluation of 1931 having an initial impact which was then in danger of being limited in 1933-1934 due to the recovery of the Canadian dollar to parity with the still yet-to-be-devalued US dollar (and even a bit of an overshoot), before the US devaluation of 1934-1935 restored the effects of the 1931-1933 devaluation and prevented the abandonment of any changes that the initial devaluation might have been spurring in relations to such things as alternatives to the fishing industry (e.g. iron exports).

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