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:

Dialectical Method

A discourse between two or more people holding different points of view about a subject, who wish to establish the truth through reasoned argumentation.

Cause-and-Effect

Refers to the concept that actions or events (causes) directly lead to certain outcomes or effects.

Contradictions

Situations or propositions in which two or more opposing things are simultaneously present, often leading to conflict or dilemma.

Dialectical Philosophy

A philosophic approach emphasizing the process of thought resolving contradictions, often associated with the works of Marx and Hegel, among others.