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Exchange controls - economic warfare defence system

 
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Whitehall_Bin_Men
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Joined: 13 Jan 2007
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PostPosted: Mon Jun 04, 2018 10:44 am    Post subject: Exchange controls - economic warfare defence system Reply with quote

The idea behind capital controls is to protect the domestic economy from excessive volatility caused by rapid inflows of capital, and from the negative effects of huge capital outflows during crises. In Britain, they were introduced as a wartime measure in late 1914. The government banned the import of foreign securities and the raising of loans for foreign investment. It also made it very hard to export gold, and commandeered foreign-currency securities held by Britons.

https://moneyweek.com/the-return-of-capital-controls/

in the past, Britons were limited to taking £50 out of the country on holiday, and, under the 1947 Exchange Control Act, were required to have these sums recorded in their passports. Equally, it was very difficult to invest in overseas assets.

Under a byzantine system known as the “investment currency market” – overseen by a staff of hundreds at the Bank of England – the authorities only allowed a fixed pool of overseas investment: the purchase of foreign assets by one UK resident had to be offset by a sale by another. These restrictions seem almost comically bizarre today, but prior to 1979 they were part of everyday life.

What was the rationale?

The idea behind capital controls is to protect the domestic economy from excessive volatility caused by rapid inflows of capital, and from the negative effects of huge capital outflows during crises. In Britain, they were introduced as a wartime measure in late 1914. The government banned the import of foreign securities and the raising of loans for foreign investment. It also made it very hard to export gold, and commandeered foreign-currency securities held by Britons.

At the start of World War II, the UK introduced even more comprehensive controls, and in the aftermath, capital controls became an accepted part of the global financial architecture. During this Bretton Woods era, economists believed that capital controls protected ordinary people from the ravages of international capital and the volatility of the 1930s, and aided free trade by keeping protectionist measures in check.

When were they lifted?

Margaret Thatcher and her chancellor, Geoffrey Howe, scrapped them in 1979. As the economic orthodoxy moved from Keynsianism to free-market liberalism, big Western economies started abolishing controls in 1973-4, starting with the US, Canada, Germany and Switzerland. The case in favour of free movement of capital is similar to that for free trade. Voluntary exchange across borders should make everyone better off: it boosts economies by channelling money to where it will be most productive and it gives borrowers access to cheaper credit, and lenders access to higher returns and/or more diverse opportunities

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