The Development of British Exchange Control 1939-45

Abstract

Exchange control can be considered as an extension of the principle of war-time rationing. There is a scarcity of the means available for making payments and therefore purchases abroad are limited. As a result the central authority allocates these resources according to its own list of priorities, instead of leaving the selection of the needs to be satisfied to be determined by competitive bidding in the market. This requires the control of imports and may also be taken to include restrictions on transfers of capital and other foreign payments. Another feature of exchange control—the requisitioning of assets which can be realized for foreign exchange—can similarly be regarded as part of the general policy of commandeering resources necessary for the purposes of war. But a comprehensive system of exchange control involves a further essential feature—the pegging of exchange rates. Theoretically it would still be possible for the central authority to leave exchange rates to be freely determined in the market, although the quantities demanded and supplied were controlled by such methods; for the possible dangers of inflationary increases in domestic prices could be overcome by the use of subsidies to offset exchange depreciation.However, several important reasons can be given for a country at war maintaining fixed exchange rates. Bear speculators might have a bad effect on the country's prestige especially when the fortunes of war were adverse. Secondly, it is easier to requisition international assets on terms which do not give large windfall profits to the sellers, if extensive depreciation of the currency can be avoided. Thirdly, consideration of the “terms of trade” offers the most substantial ground for maintaining exchange stability. In conditions of total war the resources that are used to produce exports must be reduced to the minimum. For this reason the object of policy must be to achieve the best possible price for a restricted quantity of exports rather than to expand the volume of exports by offering them as cheaply as possible.