A commentator called Martin Clews posted this morning on this blog, saying:
It is a real worry for me that any independent attempt by the UK to democratise our economy, backed by MMT, will experience attempts to sabotage it, e.g., capital flight. I realise it is not easy to move factories, etc, but there might be attempts to destabilise sterling. Do you feel the anti socialist establishment would attempt destabilisation, and what would be the countermeasures?
The answer would have to be capital controls. I posted this glossary entry on that subject yesterday, but it seems appropriate to share it as a result.
Podcast guest Larry Elliott recently mentioned his support for capital controls, and I have supported them for an extended period of time. Maybe I should mention them more often.
Capital controls are the rules and tools that a government might use to regulate the flow of money into and out of its economy. They exist to protect a country from the destabilising effects of speculative financial flows, and most especially the hot money flows that can inflate bubbles on the way in and trigger crises on the way out of an economy.
There are several aspects of capital controls that require explanation.
First, capital controls are not exotic or radical. They are simply the financial equivalent of border checks. Every nation already regulates goods, people, and data crossing its borders in some way. Regulating capital is no different: it ensures that the financial system serves the public purpose rather than being captured by footloose cross-border speculation.
Second, capital controls come in many forms. They can include taxes on short-term inflows, minimum holding periods for financial investments, limits on foreign borrowing and lending by banks, restrictions on offshore lending, and reporting requirements on large cross-border transactions. Some controls are prudential. These are designed to strengthen the banking system. Others are macroeconomic and are designed to support exchange-rate stability or prevent asset bubbles.
Third, they work. Countries that have used capital controls judiciously, from Malaysia during the Asian financial crisis to Iceland after the 2008 banking collapse, have often recovered faster and with less social damage than those that did not. These controls gave policymakers room to cut interest rates, stabilise currencies, and support domestic recovery without being punished by speculators.
Fourth, capital controls are a defence of democracy. Without them, governments are constantly held hostage by the threat that markets might withdraw funds if they disapprove of policy choices. With them, economic policy can be oriented toward public well-being rather than placating global finance. Controls weaken the power of hot money to veto democratic priorities.
Fifth, capital controls are entirely compatible with a modern, open economy. They do not prevent productive investment, whether inward or outward, real trade, or long-term international cooperation. They ensure that capital entering a country does something useful, whether that be by building capacity, creating jobs, or supporting innovation, rather than fuelling a casino.
Finally, capital controls express the fundamental principle that money is a public good, and its movement should support the stability and prosperity of the whole economy. In an age of globalised speculation, they are one of the few tools that can restore balance between democratic states and the financial systems that can too often otherwise seek to overwhelm them.
Capital controls are not about shutting the world out. They are about keeping destabilising forces in check so that society, and not speculative finance, sets the terms of economic life.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
You posted this as I was posting my comment under Hot Money. Spooky! I could not agree with you more. Capital controls seem to me to be an important means of taming the anti-social nature of the current failing neoliberalism economy. The real challenge will be getting the message across to the public. Powerful forces will resist like hell.
Agreed
Thank you, Richard.
As the Eurozone crisis moved up a gear, the Bank of England considered capital controls, not wanting a flight into Sterling to derail the fragile recovery.
One June Friday, I chaired an Anglo-Swiss event at Mansion House. Deputy governor Paul Tucker was the main speaker. He was frequently called out as Mervyn King was either at Lord’s or Wimbledon and not to be disturbed.
Tucker’s Swiss counterpart agreed with the suggestion.
Thanks
A question: do capital controls really “ensure that capital entering a country does something useful”?
I’m not sure how they can ensure that.
For capital to enter the UK there must be a currency exchange. Someone in the UK has to sell pounds so that someone with foreign capital can buy them. Consequently the capital that has supposedly entered the UK has, in fact, been here all along. If the capital was already here, could it not have been put to use without foreign intervention?
Can you help me out here and explain a bit more please.
Tim
Point accepted, but currency can change ownerhsip and use, and before sale to foreign ownership banks would have to a) determine proposed use and b) monitor it. This is entirely possible.
It’s no different to identifying illicit financial flows: that cash is also here all along, but use matters. That’s the issue I am looking at with capital flows.
Does that make sense?
Richard
That helps, thanks. 🙂
I shall think about it.
Money laundering checks have been widely introduced by many countries in recent years so the notion of checking whether the intent behind the importation of money meets the country’s desires doesn’t appear disfunctional.
Capital Controls. !979, Thatcher, order in council wrt the “dollar premium”. The order cancelled/annulled the dollar premium which was the UK’s form a capital control. Reverse the order in council ta-da.
Amusing fact: the Torygrah whinged on about well off people stopped @ Dover and lo & behold they had £10k or £20k on them to buy a house in France (you could get a nice one for that sort of money then). Money confiscated. Thus Thatcher curried favour with the well off.
Capital controls: simples. It is all in place, just reverse the order in council. City of London would go bonkers mind.
I can live with that
Here is a list of counties who have instigated capital controls in the last 20yrs.
Argentina
• Brazil
• Chile
• Colombia
• Peru
• China
• India
• Indonesia
• South Korea
• Malaysia
• Taiwan
• Thailand
• Cyprus
• Greece
• Iceland
Whether they succeeded or led to greater problems is a separate discussion. But you need to think twice as to whether it is wise to advocate a change where we add Britain to the list.
So, you would like to base policy on prejudice, not outcomes in well managed cases? Might you explain that bias on your part?
I note that Singapore is not on your list. Is that because their capital controls were first put in place more than 20 years ago and still remain in place? No, I thought not.
The issue of national sovereignty and political freedom is v important.
That is increasingly under threat by a whole raft of supra-national forces that inhibit organisations and even entire nations from taking principled actions of their own choosing.
Hot money, as you have just explained, and its destabilising effect on economies, large and small.
Over reliance on investment by super-rich individuals or other countries (eg: in universities, stifling academic freedom), or in utilities like Thames Water or train rolling stock.
Trade deals that limit a government’s regulatory or tax-raising powers, where supra-national corporation’s profits may be affected, by say, a locally imposed health regulation, taxing UPF, or alcohol, or a boycot/divest/sanction campaign, conducted on valid and compelling human rights grounds.
Powerful lobbies (fossil-fuel, gambling, food, land-owners) and whole countries whose power, wealth and corrupt behaviour penetrates, corrupts and often outguns mere democratic authority of no-longer-sovereign governments.
So any measure that clips their wings and restores sovereignty is welcome -one could almost say, “I want my country back” if the phrase wasn’t so toxic.
I’m old enough to remember UK capital controls before being abolished by the exponent of TINA back in 1979. I share your views that they curtail the activities of the speculative finance spivs and strengthen democratic control of the currency and economy. I can already hear the anguished howls of the usual suspects as I type.
Would this be a temporary necessity to use that Brexity term, “taking back control”, until it’s achieved?
🙂
Capital controls are favourably discussed in the Green Party’s Economy Policy Working Group Background Paper but there is no reference to them in the party’s 2024 manifesto.
The Background Paper contains this link to capital controls…
https://www.bis.org/publ/bppdf/bispap68f.pdf
The Background Paper which should be the basis of the GP’s economic policy was “referred back” at the recent party conference so that at present some important aspects of its economic policy are unsettled, for instance, its position on Modern Monetary Theory and its policy on banking. Capital controls should be an explicit Green Party commitment.
This is rather unsatisfactory and there is now an urgent need to produce a more coherent progressive program in support of Zack Polanski and the articulation of the progressive alternative to neoliberalism that he has begun, endorsed by his large majority and the big influx of new Green Party members.
Yes many people are keen to see the direction the Green Party will be heading on economic and monetary matters. It would make sense they firm up on this before next May’s council election which is building up to also be a vote on national political issues. Is Zack Polanski aware of this it’s hard not to think he is since it will be the first big test of his leadership whether he can drag the Green Party into paying attention to all issues facing the nation.
Whole heartedly agree with the idea.