Capital Ideas: The IMF and the Rise of Financial Liberalization

By Jeffrey M. Chwieroth | Go to book overview

CHAPTER FOUR

Capital Controlled
THE EARLY POSTWAR ERA

THE ARTICLES OF AGREEMENT provide many of the formal rules that guide the Fund's operations. Although other formal IMF rules operated differently in practice from the intent of their drafters, as Eichengreen observes, “Capital controls were the one element that functioned more or less as planned.”1 Most governments in the early postwar era employed a range of restrictions that limited capital mobility, with the widespread acceptance of Keynesian beliefs underpinning this norm. Both formal IMF rules and the informal staff approach defined controls as a legitimate policy practice.

This chapter begins by tracing the institutionalization of the norm of capital control into the IMF Articles. It then turns to analyzing two important bases of support for the maintenance of this norm during the early postwar era. One important base of support was the United States and the broader IMF membership, which generally supported restrictions on capital mobility. There was, however, one brief interval between 1945 and 1947 when U.S. officials promoted a return to neoclassical orthodoxy. Two significant events occurred during this interval: the failed attempt at sterling convertibility and an IMF board decision on the use of the organization's financial resources. The former dealt a fatal blow to the expectation that cooperative controls would be used to contain disequilibrating capital flows, while the latter ensured that the Fund's resources could not be used to support “leaky” controls. After this brief interval, U.S. officials became more accommodative, even encouraging, of the use of controls abroad. Perhaps the high point of this orientation was U.S. support for a 1956 board decision that reaffirmed the right of member states to control capital movements “for any reason.”2 This decision deepened formal institutionalization of the norm of capital control within the Fund. But member states' influence and formal rules are only part of the story.

1 Eichengreen, Globalizing Capital, p.94.

2 Executive Board Decision 541-(56/39), 25 July 1956, reprinted in Horsefield, Interna-
tional Monetary Fund, 1945–1965, vol. 3, p. 246.

-105-

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