Abstract
Since the fourth quarter of 1950 the Canadian dollar has been allowed to find its price in terms of foreign currencies, usually with little official interference. During this period special interest groups have occasionally complained about the level of the rate of exchange, but, on the whole, the operation of the new system of exchange has met with satisfaction at home and admiration abroad. This success has depended on the small amplitude of the fluctuations that have taken place in the rate of exchange during short periods of time, say quarter to quarter. However, very little is known about the mechanism that has operated to maintain such stability as the rate has shown in practice. Confidence in the future stability of the rate can easily be mistaken under these circumstances. It is the purpose of this paper to shed some light on the equilibrating process in the market in foreign exchange by identifying the stabilizing influences in the balance of payment and by developing a possible explanation of their movement.The items in the balance of international payments can be divided into two categories according to the manner in which they are related to the rate of exchange if it is assumed that they have demand and supply functions that are independent of each other and that they have ordinary Marshallian elasticities. The appropriate assumptions about other things to be held constant when analysing merchandise trade, for instance, include income and its distribution, relative prices, tastes, and production functions. The things held constant do not include other items in the international accounts such as movements of capital from which come the offsetting net supply or demand for foreign exchange. Some of the items are not independent: freight and shipping are obviously related to trade; but the smaller items are not taken up separately in this analysis.
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