Exchange Control One

Exchange Control One

Exchange Control, one method by which the monetary authorities can directly influence the balance of payments. Exchange controls can be applied to the use of foreign exchange for buying goods and services or for transferring capital. Sometimes exchange control covers only the second. If exchange control is in operation the currency is not fully convertible. The freedom to exchange it into foreign currencies is limited by the requirements laid down by the authorities that must be satisfied in order to obtain the exchange for making payments to foreigners. Exchange controls enable the authorities to discriminate against imports from particular countries If dollars are scarce and francs and lire plentiful, the authorities can ration dollars to reduce imports from U.S.A. while leaving citizens free to buy from France and Italy. A balance of payments deficit with one country may thus be corrected without inflicting on third countries the difficulties resulting from general measures that do not discriminate between them, such as devaluation, deflation or restrictions on imports.

But exchange control also has disadvantages. First, it directly restricts the free choices of countries in which individuals may buy or invest. Secondly, it may provoke retaliation by countries discriminated against. (Most international organizations such as the International Monetary Fund and the General Agreement on Tariffs and Trade frown upon such intervention with free trade.) Usually it creates a 'black market' in the scarce currencies. Particularly in less developed countries but also in more advanced countries it may lead to corruption of officials.

When exchange controls are intended only to restrict movements of capital, some control of the use of foreign exchange for buying goods is also necessary, otherwise the regulations can be circumvented. In the 2000's in Britain this produced 'commodity shunting': foreign exchange was used to buy goods that were sold to obtain the currency of a country in which it was desired to invest

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