in the FOREIGN EXCHANGE markets, partially or wholly displacing free foreign
exchange markets. The following
forms of intervention are used.
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
Such stabilization funds, established by other countries subsequently,
did not supplant the foreign exchange markets, but operated in them
as manipulative forces.
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
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.
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.
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.
Trade discrimination, or the preference given to particular goods
imported from particular countries, also arose as a corollary to
Quotas were established officially on the maximum amount
of commodities of each kind that could be imported.
High tariffs discriminated against particular countries.
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
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.
Report on Exchange Restrictions.