In the 1970s, France Had a Dual Exchange Rate System

question 6

Essay

In the 1970s, France had a dual exchange rate system in place for its residents. All business trade transactions took place at the official, or "commercial," exchange rate (say, 5 francs per U.S. dollar). All foreign investments by French industrial corporations were subject to prior government authorization. The regulation was even stricter for French financial institutions or private residents. They were not allowed to transfer currency abroad. French tourists could not take abroad more than FF 5,000 (or its equivalent in foreign currency) per year. French residents could buy foreign securities, but had to use a special "financial" rate to purchase these foreign currencies. Basically, the supply of foreign currency assigned to "financial" francs was fixed. To buy foreign securities, residents had to use the proceeds of the sales of foreign securities by other French residents. This led to a separate market for the "financial" franc with a different exchange rate. Foreign income and dividends paid were repatriated at the "commercial" franc rate and did not increase the supply of "financial" currency available. By contrast, foreigners were free to buy and sell French securities at the "commercial" rate, but they were not allowed to borrow francs.
a. Explain why this type of control imposed on French residents helps defend the French franc, which was periodically under devaluation pressure.
b. Would you expect the financial exchange rate to be higher or lower than the commercial rate?

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Definitions:

Discount

A reduction on the normal selling price of a product or service, often used as a sales incentive to increase demand or reward customer loyalty.

Formal Training Program

An organized education or instructional course designed to impart a specific set of skills or knowledge, typically in a professional context.

Selling

Convincing a person to acquire a product or service.

Knowledge

The facts, information, and skills acquired through experience or education; the theoretical or practical understanding of a subject.