Capital controls are measures such as transaction taxes and other limits or outright prohibitions, which a nation's government can use to regulate the flows into and out of the country's capital account.

Types of capital control include exchange controls that prevent or limit the buying and selling of a national currency at the market rate, caps on the allowed volume for the international sale or purchase of various financial assets, transaction taxes such as the proposed Tobin tax, minimum stay requirements, requirements for mandatory approval, or even limits on the amount of money a private citizen is allowed to remove from the country. There have been several shifts of opinion on whether capital controls are beneficial and in what circumstances they should be used.

Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s. This period was the first time capital controls had been endorsed by mainstream economics. In the 1970s free market economists became increasingly successful in persuading their colleagues that capital controls were in the main harmful. The US, other western governments, and the international financial institutions (the International Monetary Fund (IMF) and World Bank) began to take an increasingly critical view of capital controls and persuaded many countries to abandon them.

After the Asian Financial Crisis of 1997–98, there was a partial shift back towards the view that capital controls can be appropriate and even essential in times of financial crisis, at least among economists and within the administrations of developing countries.^[1] By the time of the 2008–09 crisis, even the IMF had endorsed the use capital controls as a response. In late 2009 several countries imposed capital controls even though their economies had recovered or were little affected by the global crisis; the reason given was to limit capital inflows which threatened to over-heat their economies. By February 2010 the IMF had almost entirely reversed the position it had adopted in the 80s and 90s, saying that capital controls can be useful as a regular policy tool even when there is no crisis to react to, though it still cautions against their overuse. The use of capital controls since the crises has increased markedly and proposals from the IMF and G20 have been made for international coordination that will increase their effectiveness. The UN, World Bank and Asian Development Bank all now consider that capital controls are an acceptable way for states to regulate potentially harmful capital flows, though concerns remain about their effectiveness among both senior government officials and analysts working in the financial markets.

History[link]

Pre World War I[link]

Prior to the 19th century there was generally little need for capital controls due to low levels of international trade and financial integration. In the first age of globalisation which is generally dated from 1870–1914, capital controls remained largely absent.^{[2] [3]}

World War I to World War II: 1914 - 1945[link]

Highly restrictive capital controls were introduced with the outbreak of World War I. In the 1920s they were generally relaxed, only to be strengthened again in the wake of the 1929 Great Crash. This was more an ad hoc response to potentially damaging flows rather than based on a change in normative economic theory. Economic historian Barry Eichengreen has implied that the use of capital controls peaked during World War II, but the more general view is that the most wide ranging implementation occurred after Bretton Woods.^{[2] [4] [5] [6]} An example of capital control in the inter war period was the flight tax introduced in 1931 by Chancellor Brüning. The tax was needed to limit the removal of capital from the country by wealthy residents. At the time Germany was suffering economic hardship due to the Great Depression and the harsh war reparations imposed after World War I. Following the ascension of the Nazis to power in 1933, the tax began to raise sizeable revenue from Jews who emigrated to escape state sponsored anti Semitism.^{[7] [8] [9]}

The Bretton Woods Era: 1945–1971[link]

A widespread system of capital controls were decided upon at the international 1944 conference at Bretton Woods

At the end of World War II, international capital was "caged" by the imposition of strong and wide ranging capital controls as part of the newly created Bretton Woods system- it was perceived that this would help protect the interests of ordinary people and the wider economy. These measures were popular as at this time the western public's view of international bankers was generally very low, blaming them for the Great Depression.^{[10] [11]} Keynes, one of the principal architects of the Bretton Woods system, envisaged capital controls as a permanent feature of the international monetary system,^[12] though he had agreed current account convertibility should be adopted once international conditions had stabilised sufficiently This essentially meant that currencies were to be freely convertible for the purposes of international trade in goods and services, but not for capital account transactions. Most industrial economies relaxed their controls around 1958 to allow this to happen.^[13] The other leading architect of Bretton Woods, the American Harry Dexter White and his boss Henry Morgenthau were somewhat less radical than Keynes, but still agreed on the need for permanent capital controls. In his closing address to the Bretton Woods conference, Morgenthau spoke of how the measures adopted would drive "...the usurious money lenders from the temple of international finance".^[10] Following the Keynesian Revolution, the first two decades after World War II saw little argument against capital controls from economists, though an exception was Milton Friedman. However, from the late 1950s the effectiveness of capital controls began to break down, in part due to innovations such as the Eurodollar market. According to Dani Rodrik it is unclear to what extent this was due to an unwillingness on the part of governments to respond effectively, as compared with an inability to do so.^[12] Eric Helliner has argued that heavy lobbying from Wall St bankers was a factor in persuading US authorities not to exempt the Eurodollar market from capital controls. From the late 1960s the prevailing opinion among economists began to switch to the view that capital controls are on the whole more harmful than beneficial.^[14][15]

While many of the capital controls in this era were directed at international financiers and banks, some were directed at individual citizens. For example in the 1960s British families were at one point restricted from taking more than £50 with them out of the country for their foreign holidays.^[16] In their book This Time Is Different economists Carmen Reinhart and Kenneth Rogoff suggest that the use of capital controls in this period, even more than its rapid economic growth, was responsible for the very low level of banking crises that occurred in the Bretton Woods era.^[17]

Transition period and Washington consensus: 1971 - 2009[link]

By the late 1970s, as part of the displacement of Keynesianism in favour of free market orientated policies and theories, countries began abolishing their capital controls, starting between 1973 - 1974 with the U.S., Canada, Germany and Switzerland and followed by Great Britain in 1979.^[18] Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s.^[2] During the period spanning from approximately 1980 - 2009, known as the Washington Consensus, the normative opinion was that Capital controls were to be avoided except perhaps in a crises. It was widely held that the absence of controls allowed capital to freely flow to where it is needed most, helping not only investors to enjoy good returns, but also helping ordinary people to benefit from economic growth. During the 1980s many emerging economies decided or were coerced into following the advanced economies by abandoning their capital controls, though over 50 retained them at least partially.^{[2] [19]} The then orthodox view that capital controls are a bad thing was challenged to some extent following the 1997 Asian Financial Crisis. Asian nations that had retained their capital controls such as India and China could credit them for allowing them to escape the crisis relatively unscathed.^[17][20] Malaysia's prime minister Mahathir bin Mohamad imposed capital controls as an emergency measure in September 1998, both strict exchange controls and limits on outflows from portfolio investments - these were found to be effective in containing the damage from the crisis. ^{[2] [21] [22]} In the early nineties even some pro-globalization economists like Jagdish Bhagwati ^[23] and some writers in publications like The Economist^{[21] [24]} spoke out in favour of a limited role for capital controls. But while many developing world economies lost faith in the free market consensus, it remained strong among western nations.^[2]

Post Washington Consensus: 2009 and later[link]

By 2009, the global financial crisis had caused a resurgence in Keynesian thought which reversed the previously prevailing orthodoxy.^[25] During the 2008–2012 Icelandic financial crisis, the IMF proposed that capital controls should be imposed by Iceland, calling them "an essential feature of the monetary policy framework, given the scale of potential capital outflows."^[26] In the latter half of 2009, as the crisis eased and financial activity picked up, several emerging economies adopted limited capital controls to protect against potential negative effects of capital inflows. This included Brazil imposing a tax on the purchase of financial assets by foreigners and Taiwan restricting overseas investors from buying Time deposits. ^[27]

The partial return to favour of capital controls is linked to a wider emerging consensus among policy makers for the greater use of Macroprudential policy. According to economics journalist Paul Mason, international agreement for the global adoption of Macro prudential policy was reached at the 2009 G-20 Pittsburgh summit - an agreement which Mason said had seemed impossible at the London summit which took place only a few months before.^[28]

Pro capital control statements by various prominent economists, together with a February 2010 report by the IMF have been hailed as an "end of an era" and said to represent a reversal of the IMF's long held position that capital controls should be used in crises only. ^{[29] [30] [31]} However the IMF warn that capital controls are not always appropriate and should not be used as an alternative to the more challenging policy changes needed to address the root cause of economic problems.^[32]

In June 2010 The Financial Times published several articles on the growing trend towards using capital controls. They noted influential voices from the Asian Development Bank and World Bank had joined the IMF in advising there is a role for capital controls. The FT reported on the recent tightening of controls in Indonesia, South Korea, Taiwan, Brazil and Russia. In Indonesia recently implemented controls include a one-month minimum holding period for certain securities. In South Korea limits have been placed on currency forward positions. In Taiwan the access that foreigner investors have to certain bank deposits has been restricted. The FT cautioned that imposing controls has a downside including the creation of possible future problems in attracting funds. ^{[33] [34] [35]}

By September 2010, emerging economies had experienced huge capital inflows resulting from carry trades made attractive to market participants by the expansionary monetary policies several large economies had undertook over the previous two years as a response to the crisis. This has led to countries such as Brazil, Mexico, Peru, Colombia, Korea, Taiwan, South Africa, Russia and Poland further reviewing the possibility of increasing their capital controls as a response. ^{[36] [37]} In October, with reference to increased concern about capital flows and widespread talk of an imminent Currency war, financier George Soros has suggested that capital controls are going to become much more widely used over the next few years.^[38] But several analysts have questioned whether controls will be effective for most countries, with Chile's finance minister saying his country had no plans to use them.^{[39] [40] [41]}

In February 2011, over 250 economists headed by Joseph Stiglitz wrote to the Obama administration asking them to remove clauses from various bilateral trade agreements that allow the use of capital controls to be penalised. There was strong counter lobbying by business and so far the US administration has not acted on the call, although some figures such as Treasury secretary Tim Geithner have spoken out in support of capital controls at least in certain circumstances.^[15][42]

Econometric analyses by the IMF and academic economists found that in general countries which deployed capital controls weathered the 2008 crisis better than comparable countries which did not.^[15][43] In April 2011 the IMF published its first ever set of guidelines for the use of capital controls.^[44][45] At November's 2011 G-20 Cannes summit, the G20 agreed that developing countries should have even greater freedom to use capital controls than the IMF guidelines allow.^[46] A few weeks later the Bank of England published a paper where they broadly welcomed the G20's decision in favour of even greater use of capital controls, though they caution that compared to developing countries, advanced economies may find it harder to implement efficient controls.^[47] Not all momentum has been in favor of increased use of capital controls however, for example in December 2011 China partially loosened her controls on inbound capital flows, which the Financial Times described as reflecting an ongoing desire by Chinese authorities for further liberalization. ^[48] India also lifted some of her controls on inbound capital in early January 2012, drawing criticism from economist Arvind Subramanian who considers relaxing capital controls a good policy for China but not for India considering her different economic circumstances.^[49]

The impossible trinity trilemma[link]

The history of capital controls is sometimes discussed in relation to the Impossible trinity – the finding that its impossible for a nation's economic policy to simultaneously deliver more than two of the following three desirable macroeconomic goals: 1) A fixed exchange rate, 2) an independent monetary policy, 3) free movement for capital (absence of capital controls). ^[6] In the first age of globalization, governments largely chose to pursue a stable exchange rate while allowing freedom of movement for capital- the sacrifice was that their monetary policy was largely dictated by international conditions, not by the needs of the domestic economy. In the Bretton woods period governments were free to have both generally stable exchange rates and independent monetary policies at the price of capital controls. The impossible trinity concept was especially influential during this era, as a justification for capital controls. In the Washington consensus period, advanced economies generally chose to allow freedom of capital and to continue maintaining an independent monetary policy while accepting a floating or semi floating exchange rate.^[2][15]

Free movement of capital and payments[link]

Finance workers such as those in the International Finance Centre may find ways to profitably exploit any loop holes in capital controls, often only weeks or days after they are implemented.

Full freedom of movement for capital and payments has so far only been approached between individual pairings of states which have free trade agreements and relative freedom from capital controls, such as Canada and the U.S., or the complete freedom within regions such as the European Union, with its "Four Freedoms" and the Eurozone. During the first age of globalization that was brought to an end by World War I, there were very few restrictions on the movement of capital, but all major economies except for Great Britain and the Netherlands heavily restricted payments for goods by the use of current account controls such as tariffs and duties.^[2]

Arguments in favour of free capital movement[link]

Pro free market economists claim the following advantages for free movement of capital:

• It enhances the general economic welfare by allowing savings to be channelled to their most productive use.^[21]
• By encouraging foreign direct investment it helps developing economies to benefit from foreign expertise.^[21]
• Allows states to raise funds from external markets to help them mitigate a temporary recession.^[21]
• Enables both savers and borrowers to secure the best available market rate.^[6]
• When controls include taxes, funds raised are sometimes siphoned off by corrupt government officials for their personal use.^[6]
• Hawala-type traders across Asia have always been able to evade currency movement controls
• Computer and satellite communication technologies have made Electronic funds transfer a convenience for increasing numbers of bank customers.

Arguments in favour of capital controls[link]

Pro capital control economists have made the following points.

• Capital controls may represent an optimal Macroprudential policy that reduces the risk of financial crises and prevents the associated externalities.^[1][50]
• Global economic growth was on average considerably higher in the Bretton Woods periods where capital controls were widely in use. Using Regression analysis, economists such as Dani Rodrik have found no positive correlation between growth and free capital movement.^[21]
• Capital controls limiting a nation's residents from owning foreign assets can ensure that domestic credit is available more cheaply than would otherwise be the case. This sort of capital control is still in effect in both India and China. In India the controls encourage residents to provide cheap funds directly to the government, while in China it means that Chinese businesses have an inexpensive source of loans.^[17]
• Economic crises have been considerably more frequent since the Bretton Woods capital controls were relaxed. Even economic historians who class capital controls as repressive have concluded capital controls, more than the period's high growth, were responsible for the infrequency of crisis.^[17] Studies have found that large uncontrolled capital inflows have frequently damaged a nation's economic development by causing its currency to appreciate, by contributing to inflation, and by causing unsustainable economic booms which often precede financial crises - caused when the inflows sharply reverse and both domestic and foreign capital flee the country. The risk of crisis is especially high in developing economies where the inbound flows become loans denominated in foreign currency, so that the repayments become considerably more expensive as the developing country's currency depreciates. This is known as original Sin (economics).^[2][51][52]

See also[link]

• Price control
• Bretton Woods System
• Impossible trinity
• Mundell–Fleming model
• Financial repression
• Macroprudential policy

Notes and references[link]

Further reading[link]

• States and the Reemergence of Global Finance (1994) by Eric Helleiner - Chapter 2 is excellent for the pre WWII history of capital controls and their stenghening with Bretton Woods. Remaining chapters cover their decline from the 60s through to early 90s. Helleiner offers extensive additional reading for those with a deep interest in the history of capital controls.

External links[link]

• Christopher J. Neely, An introduction to capital controls (PDF), Federal Reserve Bank of St. Louis Review, November/December 1999, pp. 13–30
• James Oliver, What are Capital Controls?, University of Iowa Center for International Finance & Development
• Ethan Kaplan, Dani Rodrik (2001) Did the Malaysian capital controls work? NBER Working Paper No. 8142
• Bryan Balin, India’s New Capital Restrictions: What Are They, Why Were They Created, and Have They Been Effective? The Johns Hopkins University, 2008
• José Antonio Cordero and Juan Antonio Montecino, Capital Controls and Monetary Policy in Developing Countries, Center for Economic and Policy Research, April 2010
• Financial Times (2011) Global summary showing most of the worlds population are subject to capital controls as of 2011
• Kevin Gallagher, Regaining control - detailed paper on the use of capital controls post WWII, with emphases on the increased use after the 2008 crises, UMass, 2011
• Anton Korinek (2011), The New Economics of Prudential Capital Controls (PDF), IMF Economic Review 59(3), 2011

The Dancing Man is the name given to the man who was filmed dancing on the street in Sydney, Australia, after the end of World War II. On 15 August 1945, a reporter took note of a man's joyful expression and dance and asked him to do it again. The man consented and was caught on motion picture film in an Australian edition of the newsreel Movietone News. The film and stills from it have taken on iconic status in Australian history and culture, and symbolise victory in the war.

Identity[link]

There has been much debate as to the identity of the dancing man. The identity commonly accepted, though, is that he is Frank McAlary, a retired barrister who claims that he was the man photographed pirouetting in Elizabeth Street, Sydney, on 15 August 1945. A Queen's Counsel, Chester Porter, and a former Compensation Court judge, Barry Egan, both claim to have seen Mr. McAlary being filmed dancing.^[1]

The television programme Where Are They Now, produced by Australia's Seven Network, attempted to solve the mystery of the dancing man's identity. The network hired a forensic scientist who examined the film reel and picture and came to the conclusion that it was indeed McAlary.

The Royal Australian Mint, however, chose to portray Ern Hill as the dancing man on a 2005 issue $1 coin commemorating 60 years since the World War II armistice. Mr. Hill has made a statement that, "The camera came along and I did a bit of a jump around."^[1] The coin, sculpted by Wojciech Pietranik, does not bear any name.

Rebecca Keenan of Film World Pty. Ltd., says the dancer may be one Patrick Blackall.^{[citation needed]} Mr. Blackall has claimed, "I'm the genuine dancing man," and has signed statutory declarations that he is the man in the film.

See also[link]

• V-J Day in Times Square, an image of V-J Day in Manhattan

Notes[link]

References[link]

• "Dancing man still got the moves." St George Leagues Club, Leagues Club Journal. 25 July 2005
• Macy, Richard. "Who is the dancing man?." Sydney Morning Herald, 8 December 2004
• Stephens, Tony. "Famous pirouette of peace stepping up to a war dance" Sydney Morning Herald, 10 August 1995
• Movietone clip with teacher's notes on australianscreen online