Covering Globalization: A Handbook for Reporters

By Anya Schiffrin; Amer Bisat | Go to book overview

CHAPTER FIVE
CAPITAL
CONTROLS

ANYA SCHIFFRIN


HISTORY

FROM THE 1940s to the late 1980s, capital controls, or restrictions on the flow of money across borders were the norm around the world. In Europe, anyone who needed a foreign exchange to trade with another country (so-called current account transactions) to buy goods or services could get it. But it was not so easy to get money that could be used for financial transactions such as currency speculation or buying and selling stocks in another country’s equity markets. Often there was a special, less-favorable exchange rate for such transactions. Ordinary individuals confronted these capital controls when they wanted to take trip abroad: typically, they were allowed only a limited amount of foreign exchange.

It hadn’t always been this way. In the nineteenth century there were no man-made restrictions on the flow of capital. But, at least partly because of the lack of technology, capital moved far more slowly than it does today. Until the 1930s; the world was on the gold standard—a system by which all domestic money had to be backed, in full, by the government’s gold reserves. This meant that for every dollar in circulation, you had to have one dollar’s worth of gold sitting in the central bank’s vault. In essence, the government promised to convert any or all of the country’s local currency for gold at a constant rate of exchange. The idea behind the system was easy: if a country ran a balance-of-payments deficit, which meant it needed to borrow to pay for imports, gold would leave the country as payments for imports went out faster than payments for exports came in. To maintain full backing, the government would have had to respond by taking

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