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May 26,
Exchange Control Compared to Quotas
as Temporary Equilibrating Devices
Howard S. Ellis,
Division of Research and Statistics
Board of Governors of the
Federal Reserve System
In a general multilateral convention to relax trade barriers,
provision may need to be made for import controls to cope with temporary
balance-of-payments difficulties$ provided insufficient tiding-over
credits are available through the Stabilization Fund or other "outside"
sources of credit. The question then arises as to whether exchange
control or import quotas would be the more eligible device in view of
the avowed liberal character of the trade convention. Exchange control
in this context would presumably exclude bilateral clearing, multiple
exchange rates (at least of an explicit nature) and all such discrimination as does not necessarily inhere in the vary necessity of excluding
a certain amount of imports by limitation other than that imposed by
free market prices• By exchange control we shall therefore mean the
authoritarian allocation or rationing of foreign exchange for the payment
of imports; and by quotas, the direct quantitative limitation of
permitted imports of certain categories. Exchange control in the sense
of ad hoc measures to prevent a flight of capital need not be discussed,
for~hough it is a means of bridging over balance-of-payments difficulties,
it does not in this particular sense appear as an alternative to quotas,
but could be used as a correlative measure.
In some respects exchange control (in the relevant sense of
exchange rationing) and quotas stand upon an equal footing; indeed,
by and large, their effects are more similar than different. Nothing
prevents their being used to achieve exactly the same quantitative limitation on the import of the same goods and services. With either there
is nothing to prevent the use of a system of import licenses and the
absorption of monopoly gains of importers by the sale (e.g. to the highest
bidder) of these licenses or by some system of taxation. And nothing
prevents the trade authority in the country involved from limiting imports
in either case to the visible supply of available foreign exchange in
order to avoid the accumulation of debt on current trade * Finally there
appears to be no presumption from past experience that one or the other
device lends itself better than the other to administrative application
in contrast with the less flexible, quasi-legal form of commercial
agreements and treaties•
There are two respects in which exchange control appears to be
generically superior to quotas, though I would not stress these advantages
very strongly. Exchange allocation can be applied more easily to a

~ 2 ~
group of commodities (e,g# sporting goods) than quotas can be, since it
is difficult to invent a physical-quantity common denominator for the
articles in such a congeries, while the value common denominator is
both natural and unambiguous. And the larger the congeries of goods,
the less the import control can be called discriminatory* Secondly, on
the score of effective enforcement, exchange allocation would seem to
be superior in case the trade authority desired to include services
in limitation of imports, for they could easily elude the quantitative
quota device9
Two other advantages of exchange control, more important than
those just mentioned, are not "generic" but depend upon the institutional
fact that neither the exchange allocation nor the quota are apt to be
revised at very short intervals so as to maintain imports at exactly
the contsmplated ("original") level for the period of the emergency.
Imagine a given restriction of imports to be in effect through
exchange rationing. If now the prices of imports decline the original
exchange ration, being a value total, permits a larger volume of imports;
but this is as it should be, since the restriction was introduced to
cope with bulance-of-payments difficulties, which are now alleviated
as imports become cheaper, If the price of imports rises the volume of
imports, under a fixed foreign exchange ration, declines; and again this
"automatic" effect -- assuming no revision of the aggregate amount of
exchange rationed — is as it should be, since greater stringency now
attends the increased balance-of-payments difficultyf But if the restriction
of imports were carried through by means of quotas, this automatic and
desirable adjustment would be precluded»
A fourth advantage of exchange rationing is that it would permit
a larger volume of imports without immediate added difficulty for the
balance of payments if foreign sellers, realizing that the trouble is only
temporary, would extend more or longer commercial credits* These credits
aid in the bridging over, without doubtf Of course if the trouble proved
to be more protracted, this advantage would disappear, for the short term
credits would eventually fall due. But the risk of only postponing the
necessity of payment for certain imports which attends the limitation
of purchasing power instead of physical entry, is probably offset by the
reflection that exchange rationing prevents (as quotas would not) the
speculative purchasing ahead of needs and ahead of actual importation
which might develop in the hope of a short period of emergency• On balance
therefore from this angle, the advantage lies with exchange control*
The use of either quotas or exchange rationing inevitably
involves departures from the categoric proscription of multiple exchange
practices and discrimination which both the monetary stabilisation plan
and the multilateral trade convention contemplate as the normal situation
These departures arise from the facts that on the one hand the international money and trade authorities are not prospectively to be endowed
with compulsory powers over member countries1 domestic fiscal and
monetary powers, and on the other hand exchange rates are — no doubt

-3 advisedly — not to be permitted to move with absolute freedom* Taking
these policies as data, we then address ourselves to the question (as we
have here) as to how the departures can be made least objectionable*
But there is no denying the basic incompatibility of the devices with
the general aim of a free and non-discriminatory system. The apology for
using them rests at bottom upon the necessity of temporary stop-gaps in a
setting in which the powers of international bodies over domestic economic
policies are subject to severe limitations*
The outstanding example of the argument of the preceding
paragraph is found in the provision of the International Stabilization Fund
that if a currency disposed over by the Fund becomes scarce* the Fund
may allocate the currency to member countries according to its own
discretionf and permit countries to ration out their allocation according
to their own devices« Whatever device this may be (quotas, exchange
rationing, etc.), it is clear that the countries must be permitted to
"discriminate" against the imports of the scarce currency country, since
any uniform reduction of imports from all countries would impose a wholly
gratuitous shrinkage upon world trade* The multilateral trade convention
could, however, prohibit discrimination against other countries•
If the difficulty pertains primarily to the general position of
a particular country, and not just to a scarcity of one currency (for
example, dollars), the convention could provide that, if certain commodities
are to be singled out (e*g* luxuries) for import limitation, the selection
shall not be made in such a way as to be discriminatory against a
particular exporter* For example, it ought not to be permitted to restrict
Scotch whiskey but not American bourbon* Alternatively it would be
possible to make a rule requiring any country resorting to import
restriction by exchange control during temporary balance-of-payments
difficulties to reduce the exchange allocation by the same percentage for
all import items* Such a rule would indeed approach the ideal of no
discrimination, though even here some injustice might be involved to a
particular export country because of its unusually low position in the
countryfs imports in the base year or years* But the chief objection
would be that discriminating against luxuries is a natural or necessary
discrimination for a country seeking to economize imports during temporary
balance-of-payments difficulties* If the validity of this objection is
admitted it would be implicitly upon the basis that some degree of
"discrimination" is recognized as "reasonable" (or not intentionally
discriminatory) on grounds of social justice within the economy of the
import-restricting country*
Much the same reflection is relevant to the matter of import
licenses and monopoly gains* whether the licenses are conjoined with
exchange rationing or quotas« Having regard to the preservation of a
competitive price system and the desirability of state appropriation
of monopoly gains, the import-restricting country may well desire to
sell exchange to importers in the restricted fields at a price appropriating
monopoly profitsf or to auction off import licenses, or to tax away
monopoly profits in case the licenses are simply granted out-of-hand#

In the first of these three procedures it is quite apparent that concealed
multiple exchange rates exist; in the second and third cases the phenomenon
is less explicit, but it nevertheless remains a mechanical equivalence•
As soon as imports are restricted, the system is in some real sense
discriminatory; monopoly gains are inevitable and the only offset —- and
this of course offers no solace to foreign exporters — is that the
monopoly windfall can be made to accrue to the government of the importing
In conclusion: we have found exchange control preferable to
quotas if import limitation is to be carried through for temporary balance
of payments stringencies by either of these devices. The case for
temporary increases of import tariffs as an alternative to either of
these ought to be thoroughly explored before resort to either quotas or
exchange control is admitted. In general quotas are generally believed
to exercise a somewhat more inflexible limitation on imports than tariffs;
and exchange control carries with it the danger that, instead of being
directed to nondiscriminatory limitation, it may open the door to all sorts
of outright discrimination through multiple exchange rates, country and
even personal differential treatment, and the restrictions and distortions
of bilateral clearings•