Foreign exchange control

The expression "foreign-exchange control" generally includes a variety of measures aimed at a number of policy goals. They may include the maintenance of a legal, but a fictitious exchange rate. But the primary purpose is to prevent foreign creditors from withdrawing funds and putting their debtors into difficulty. By forbidding debtors from making payments they owe abroad, they are freed from the consequences usually connected with default on a loan.

Effects
According to Mises, "foreign exchange control is tantamount to the full nationalization of foreign trade. ... Where every branch of business depends, to some extent at least, on the buying of imported goods or on the exporting of a smaller or greater part of its output, the government is in the position to control all economic activity. He who does not comply with any whim of the authorities can be ruined either by the refusal to allot him foreign exchange or to grant him what the government considers as an export premium, that is, the difference between the market price and the official rate of foreign exchange. Besides, the government has the power to interfere in all the details of every enterprise's internal affairs; to prohibit the importation of all undesirable books, periodicals, and newspapers; and to prevent anybody from travelling abroad; from educating his children in foreign schools; and from consulting foreign doctors. Foreign exchange control was the main vehicle of European dictatorships.

As Rothbard noted, "Gresham's Law tells precisely the result of any arbitrary price control. Whatever rate is set will not be the free market one, since that can be only be determined from day-to-day on the market. Therefore, one currency will always be artificially overvalued and the other, undervalued. Generally, governments have deliberately overvalued their currencies - for prestige reasons, and also because of the consequences that follow. When a currency is overvalued by decree, people rush to exchange it for the undervalued currency at the bargain rates; this causes a surplus of overvalued, and a shortage of the undervalued, currency. The rate, in short, is prevented from moving to clear the exchange market. In the present world, foreign currencies have generally been overvalued relative to the dollar. The result has been the famous phenomenon of the "dollar shortage" - another testimony to the operation of Gresham's Law."

Links

 * XXXI. Currency and Credit Manipulation: Foreign Exchange Control and Bilateral Exchange Agreements by Ludwig von Mises, from Human Action
 * 3. Foreign Exchange Control by Ludwig von Mises, from Interventionism: An Economic Analysis by Ludwig von Mises
 * The East India Company and Its 17th-Century Defenders by Murray N. Rothbard, from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith
 * Foreign exchange controls on Wikipedia