Capital Controls: A Cure Worse than the Problem?

Abstract

Free capital movements played an important part in the economic integration and globalization of the nineteenth century. By the end of that century, capital flows were on a remarkable scale.

The modern use of capital controls dates back to the 1930s. In this paper, the author analyzes historical experience with capital controls, in Britain and elsewhere, and reviews the theory. He concludes that such controls are damaging and that there is no case for reviving them, as some economists have suggested and as anti-globalizers would wish. Capital mobility improves the worldwide allocation of resources, channelling resources to their most productive uses. Controls on capital movements result in deadweight losses and bureaucratic costs. They are difficult to remove and they damage the credibility of the government's commitment to a market economy.

Keywords: Capital, globalization, gold standard, Breton Woods, investment

JEL Classification: E22, E42