Forex: Exchange Control
This implies a full or partial regulation by the government of payments from one monetary area into all others; of the disposition of foreign assets and incomes of residents of the monetary area concerned; and even of the domestic assets of nonresidents. In an exchange control country the ordinary citizen cannot purchase foreign currency in the free market for most purposes--- an example is to pay for imported merchandise, foreign travel or insurance premiums payable abroad, or to make remittances to relatives living abroad.
Neither is he free to sell his foreign exchange receipts from, say, exports, foreign dividends or royalties, which must usually be sold to the exchange control authority at the rate fixed by it and foreign exchange can be purchased only from that authority, after careful scrutiny of the purpose, again at fixed rates.
Thus the supply and demand for foreign exchange will be regulated and the controlled exchange rate is usually kept higher than it would be in a free market. The exchange control authority is usually central government, which can, however, delegate its powers to the central bank or other centralized institution. This, in turn, operates through the normal banking system.
Exchange control gives the government the power over the disposition of all foreign exchange resources, enabling it to regulate spending abroad according to national priorities, like the outbreak of war. But exchange control is usually imposed to prevent or to redress an adverse balance of payments either in a country's current accounts, or, more often, in its capital accounts.
Thus it might be imposed to prevent the flight of capital or the immediate depreciation of the currency; to secure cheap foreign exchange for government purposes, say, for paying foreign debt service, or to insulate the country from external influences while economic readjustment takes place. Once imposed for a purely monetary reason, exchange control can easily be used as a tool of trade policy. Thus, the charging of differential exchange rates for currencies needed to pay for different commodities imported from the same country (one of the multiple practices) has similar effects to the imposition of tariffs, while the imposition of a system of allocation of foreign currency for imports is an alternative to direct quantitative restrictions of trade--- like import quotas.
Through the control of imports exchange, control can be used as one of the instruments of internal economic planning and even as a tool of total economic control. During the World War 1 and after, state intervention in the exchange market through discount, open-market or trade policies has no doubt been practiced since trade moved across frontiers. But such policies operated indirectly, for example--- through heir effect on the volume of monetary circulation, and not directly on individual transactions.
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