Chapter 9: Capital flows and capital controls
9. Capital ﬂows and capital controls Harold James No debate in international economics has been as prolonged, sustained and intense, or – for that matter – as inconclusive, as that over the beneﬁt or harm of capital ﬂows and therefore implicitly about the desirability of capital controls. This chapter discusses some of the circumstances why individual countries and the system as a whole may prove more restrictive of capital ﬂows in the future than was the case in the 1990s: a discussion which is actually in large part quite independent of the debate about the economic repercussions of capital movements. There were, historically, two periods in which the discussions about capital movements and capital controls were especially intense: in the 1930s and 1940s, in the wake of the Great Depression; and again in the 1990s. In the ﬁrst, capital ﬂows were widely seen as the major culprit for the Great Depression. An inﬂuential account by Ragnar Nurkse explained that irrational movements had been prompted by the instability of the international monetary system, and of an inadequate mechanism for setting exchange rates. The argument expounded by Nurkse relies heavily on the idea that hot money ﬂows, which had in particular been a concomitant of political crises in the 1930s and which were thus thought to undermine democracy and international peace as well as international economic relations, were triggered primarily by expectations of exchange rate movements. J.M. Keynes’s great plea of the 1930s was to ‘let ﬁnance be national’. An alternative tradition,...
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