Capital Controls

1. Read the case. Describe the evolution of capital controls as practiced by governments around the world since WWI. Summarize the debate for and against the use of capital controls. An effective answer to the question will involve digging deeper into the information discussed in the case. Specifically, the best papers will utilize arguments from the sources detailed in the footnotes of the case (say 3 of the sources). Before World War I, there were not that many capital controls simply because of the gold standard that was used. If a country used capital controls, it was highly unusual and very costly. In 1933, the US effectively abandoned the gold standard because of the Great Depression. “Allowing the government to pump money into the economy and lower interest rates.” 1 The US Great Depression and use of capital controls instead of the Gold Standard motivated European countries to begin to adopt similar capital controls to help their economies effected by the Great Depression as well. After most developed countries began to move away from the Gold Standard and began looking for a way that they could have monetary policy autonomy, the Bretton Woods system came into play. This system looked to have foreign currencies tied to the US dollar and “if a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price.” 2
While the Bretton Woods standard fell apart in the 1970’s, we can see a lot of monetary policies hinge on this idea of exchanging, buying, and selling currencies as a way of capital control. The main reason for the Bretton Woods system’s failure was Nixon’s decision to abandon the Gold Standard entirely. Once the US dollar was not attached to gold anymore, countries began to adopt more liberal policies toward their