Goverment Control

When the foreign exchange needs of a country exceed total receipts from abroad, and it is unable to receive foreign credits, the exchange value of the currency of the country tends to decline. Under these conditions, the government has the alternative of allowing freedom of transactions in foreign exchange and permitting its currency to depreciate, or of abandoning free transfer of currency by the establishment of exchange control. The aim of such control is to limit the demand for and to increase the supply of foreign exchange in order to maintain a stable exchange rate. Control usually provides for allocating foreign exchange only for approved imports and requires that all or part of the foreign exchange derived from exports or other sources be given to the central bank in exchange for local currency. Since the worldwide depression of the early 1930s, many countries, particularly the developing ones with limited exchange reserves, have periodically instituted foreign exchange controls. To help resolve the unbalanced international payments situation after World War II (1939-1945), the United Nations established in 1946 the International Monetary Fund and the International Bank for Reconstruction and Development. The fund promotes currency stability and removal of foreign exchange restrictions by granting member nations foreign exchange loans to cover temporary deficits in their international accounts. The bank grants long-term foreign currency loans to member countries for specific projects.