Robert Mundell

This shows why it is preferable for state intervention in the economy instead of allowing the "invisible" hand to do its work. This is by a Conservative economist which is a supply sider but is also a Nobel Prize winner.

"The Bank of Canada was a comparatively young central bank, created only in 1935. A quick glance at its subsequent history will set the stage for a discussion of dollarization. During World War II, the Bank of Canada served as a handmaiden of the Ministry of Finance, assisting in the war effort by providing credit to the government that doubled the price level. (In this respect the Bank was no better and no worse that its peer group, the Federal Reserve and the Bank of England.) The traditional parity of the Canadian dollar with the American dollar was maintained by exchange controls and "austerity" in the post-war period. After September 1949, following the great 30 per cent devaluation of sterling, Canada devalued by 10 per cent. However, after the opening of hostilities in Korea, capital inflows swamped the monetary authorities and they reacted, not by returning to parity (it would have focused attention on what could be called the mistake of 1949), but by moving on to floating exchange rates. This was in violation of the IMF charter, but Canada was given permission to float pending its determination of a new parity. By accident, therefore, Canada pioneered in the development_for what would become a G-7 country_of floating exchange rates.

The Canadian dollar was kept strong, at a premium over the US dollar, by the Bank of Canada's tight monetary policy, but it proved to be at the expense of growth and caused excess unemployment. In the early 1960s, the Canadian authorities came to believe that the Canadian dollar was overvalued and the Minister of Finance announced its determination to use the resources of the Bank of Canada to depreciate the rate. This action proved to be a mistake as the bottom fell out of the market. In a panic, the authorities reacted by supporting the rate at US$ 0.92, fixing the rate at that level and drawing on the International Monetary Fund. The Canadian dollar was then kept fixed throughout the rest of the decade, and during this period Canada experienced the US inflation rate and the great growth boom of the United States. In 1970, however, in the midst of the US recession of 1970-71, the Canadian dollar was again set loose, and it promptly appreciated. Since that time Canada has had a floating exchange rate. The experience from 1970 until the present therefore constitutes a useful test case of the efficiency and effectiveness of flexible rates. In fourteen of the twenty years between 1972 and 1991, Canada had a higher inflation rate than the United States, but in the 1990s, the Canadian inflation rate has been in general lower than the American. The Canadian dollar, however, which had once in the 1970s been as high as US$ 1.07, fell to a (so far!) all-time low of US$ 0.62 in 1998. A fixed exchange rate would obviously have given Canada a lower rate of inflation over the period. At the same time Canada's unemployment rate and growth rate were in general significantly lower than those in the United States and Canada, contrary to the long-term pattern, did not participate in the magnificent boom that got its start in the early 1980s. The prima facie evidence is that Canada has paid a price for its flexible exchange rate in the form of a poorer economy."