Information > Financial Terms > This page

Exchange Restrictions 
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Official intervention in the FOREIGN EXCHANGE markets, partially or wholly displacing free foreign exchange markets.  The following forms of intervention are used.

           1.  The voluntary suspension of the gold standard and depreciation in exchange value of a  currency under a MANAGED CURRENCY program may be classified as a primary form of  exchange restriction.  In 1931, this policy was inaugurated by the United Kingdom and the  STERLING AREA as a means of reversing the deflationary effects of gold outflows and  promoting lower export prices of goods to stimulate a more favorable INTERNATIONAL  BALANCE OF PAYMENTS.  The EXCHANGE EQUALIZATION FUND was established in  1932 as a means of assuring desired levels in the exchange value of the pound sterling.   Such stabilization funds, established by other countries subsequently, did not supplant the  foreign exchange markets, but operated in them as manipulative forces.

           2.  In lieu of exchange depreciation, controls over specific items in the balance of payments  causing exchange fluctuation are another form of direct exchange control.  This necessitated  bringing all foreign exchange transactions under official regulation by a centralized official  control agency, usually the central bank.  Exports of currency and gold were prohibited.  All  exporters were required to sell their exchange to the control agency at official rates.   Purchases of foreign exchange at official rates were permitted for approved transactions  only, excluding capital export purposes.  Exchange rationing involved making available only  a part of needed foreign exchange where particular foreign exchange resources were low.

           3.  BLOCKED CURRENCY practices would concurrently tie up foreign balances in a country.   The foreign balances were blocked even in the purchase of goods for export, in the most  extreme version, lest such foreign funds use that device as a means of leaving the country.   Negotiation with holders of blocked foreign funds would result in reductions in interest rates,  extensions of maturities, and even reductions in principal as consideration for partial  unblocking.  

           4.  Bilateral agreements between two countries were evolved as a means of agreed operation  of exchange controls to mutual advantage.  Clearing arrangements and payments  agreements were the result of such agreements.   Payments agreements would involve the setting of an agreed ratio of exports and imports  between two countries, so as to assure the ability of the debtor country to meet service on    obligations due the creditor country.  Payments would be made in foreign exchange, so that  the foreign exchange markets were not bypassed, as in the case of clearing agreements.   The foreign exchange derived from exports to the creditor country would be carefully nursed  so as to have the exchange available to meet payments for imports and for debt service to  the creditor country and withdrawals permitted from blocked accounts.

           5.  Multilateral agreements arose where three or more countries were parties to exchange  control agreements.  Before establishment of the International Monetary Fund, the Tripartite  Agreement of 1936 brought together the U.S., Great Britain, and France, and later Belgium,  Switzerland, and the Netherlands, in a multilateral agreement to avert competitive exchange  depreciation.

           6.  Trade discrimination, or the preference given to particular goods imported from particular  countries, also arose as a corollary to exchange controls.  Quotas were established officially  on the maximum amount of commodities of each kind that could be imported.  High tariffs  discriminated against particular countries.

           7.  Multiple exchange rates, involving different rates for different commodities imported or  exported to particular countries, were developed both as a means of control and as a device  for discrimination in lieu of tariffs and quotas.  Favored trade with favored countries would  be granted virtual subsidies by favorable rates and retention of exchange quotas granted to  traders.

The outbreak of World War Ii led to imposition of tight licensing of imports and exports, exchange control regulations, freezing of enemy exchange, funds, and property, and requisitioning of private security holdings abroad.  With the end of the war, exchange restrictions continued because of balance of payments difficulties.  Multiple and trade discrimination continued in varying degrees despite the efforts of such agencies as the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT).  The primary problem of dollar shortage led to the 30.5% devaluation of the pound sterling by the United Kingdom on September 18, 1949, followed in quick succession by devaluation by some 28 other countries in 1949.  However, by the close of 1958, nonresident convertibility for their respective currencies was established by the United Kingdom, Austria, Belgium, Denmark, Finland, France, West Germany, Italy, Luxembourg, the Netherlands, Norway, and Sweden.

Most recently, amendment to the articles of agreement of the International Monetary Fund to provide for special drawing rights (SDRs) made it "possible for the international community deliberately to supplement existing reserve assets by the creation of special drawing rights, in order to bring the stock and rate of growth of reserves up to whatever level is deemed desirable and prudent."


INTERNATIONAL MONETARY FUND.  Annual Report on Exchange Restrictions.

Back to Information