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Are Capital Controls Coming to America?

By: Gary North

-- Posted Wednesday, 30 May 2012 | | Disqus

Are capital controls coming to the United States? They may be for Switzerland, The Swiss National Bank has announced that it is considering the imposition of controls. But these will be controls on euro accounts being shifted into Swiss francs.

Why would a central bank impose controls on money flowing in? Because this will raise the market price of francs in relation to euros. The central bank is dominated by mercantilist thinking. A rising currency is seen as a liability. Why? Because exporters are hit by the falling value of the foreign currency. Foreigners must pay more to buy francs to buy Swiss goods.

Most nations that have ever imposed capital controls have imposed them on the "outflow" of money. I put "outflow" in quotation marks, because there is no outflow of money.

Digits do not flow across borders the way that goods and people do. Ownership of digital accounts in one nation's banks get traded for digital accounts in foreign nations' banks. The money supply does not change. What changes are the owners of the digits on the various bank accounts. Ownership of digital money shifts. The people trying to exchange dollars for some other currency must find sellers of that currency who are willing to sell. But the total amount of dollars in domestic bank accounts does not change, nor does the total amount of foreign currency digits in foreign bank accounts. Central banks and fractional reserves establish the domestic money supply. Foreign exchange markets do not. This is not widely understood.

To try to stop the shift in owners of U.S. dollar accounts, the government could impose export controls in the form of taxes on dollar transfers of ownership. Or the government could declare it illegal for holders of dollar accounts in American banks to exchange ownership for non-dollar accounts in foreign banks.

Could this happen here? One of my subscribers posted these questions:

How likely is it we will see capital controls put in place prohibiting financial assets from leaving the U.S.? If that happened, how might this damage one's personal wealth remaining in the U.S.? What is the likelihood of a forced repatriation order mandating the return of off-shore assets to the U.S.? It has been reported that: "Just this week, two of the most powerful U.S. congressmen Barney Frank and Sander Levin released a letter they'd sent to U.S. Treasury Secretary Tim Geithner, expressing their concerns over future U.S. free trade agreements if the government doesn't address capital controls. The headline of the letter is: Frank and Levin Call on Administration to Clarify Position on Capital Controls. Frank and Levin have long been concerned that the language in U.S. trade and investment treaties was too restrictive and did not leave adequate flexibility for governments to use controls to stem the massive flows of speculative capital that can exacerbate economic crises.

The congressmen specifically state they want additional power to restrict the flow of capital into and out of the United States... their letter stated: We request an official written statement of U.S. policy on the Administration's interpretation that the scope and coverage of the 'prudential exception' in U.S. free trade agreements and bilateral investment treaties grants parties the ability to deploy capital controls on the inflow or outflow of capital without being challenged by private investors." It seems capital controls will be implemented, although I am not real clear what damages to personal wealth this will cause. Also, what is the probability of a forced repatriation order? If the government goes that far we can be sure it would be very damaging to one's assets.


The question is this: Does Barney Frank, a minority Democrat who is retiring from public office at the end of this year, have any clout in the House of Representatives? It does not seem to me that he does. What of Sander Levin? He is an 80-year-old Democrat from Michigan. His younger brother is Sen. Carl Levin of Michigan. He is the ranking member of the House Ways and Means Committee. He has more clout than Frank, but with Republicans controlling the House, this means little.

Geithner so far has resisted all attempts to impose capital controls. The U.S. dollar is the world's reserve currency. If there were restrictions placed on the use of dollar accounts in U.S. commercial banks to purchase non-dollar accounts in foreign commercial banks, foreign central banks could impose a moratorium on the purchase of Treasury debt. That would create a financing crisis for the Treasury Department.

The situation today is that about 40% of the U.S. debt held by the public is held by foreigners, mainly foreign central banks. To impose capital controls would be to play a dangerous game of monetary chicken. The Treasury could not impose controls without a lot of risk to its debt-rollover financing plans.


A person who wishes to buy an appreciating asset a foreign currency is harmed. He is stuck with dollars. He wants out. He cannot get out.

A foreigner who wishes to buy dollars at the lower price is harmed. This includes foreign importers of American goods. He cannot find sellers of dollars.

The export industry is harmed. Foreigners cannot buy dollars to buy American goods. The dollar is kept artificially high on the legal currency markets.

An American who wants to buy American-produced goods that would normally have been exported is benefitted. The exporter cannot find buyers abroad, because buyers abroad cannot buy dollars. Americans are now the buyers, because domestic prices are low for Americans, who own dollars.

Black marketers of currency are benefitted. They find that the price spread between dollars and other currencies increases. Their market niche gets lots of new demand from buyers and sellers of dollars.

Companies that get special export licenses are benefitted. There are always special situations where businessmen with contacts inside the regulatory agencies receive exemptions.

The overall effect is to reduce liberty of people on both sides of the border. But there are winners, too. The customers overall are harmed, because the asset they want to use in voluntary exchange is no longer available on the free market principle "high bid wins on the open market." There are still high bids, but these take place on hidden markets, i.e., black markets.


In earlier eras, in which legally fixed exchange rates were imposed by means of the Bretton Woods Agreement (1944), there were clear reasons to impose controls. Not to impose them would expose the real conditions of supply and demand for money. Why? Because the free market's system of voluntary exchange would expose the price controls on money fixed exchange rates as being economically irrational. Speculators would have been able to short the weak currency by going long on the strong one. Speculators speed up price adjustments. The free market's pricing calls to the world's attention the futility of imposing price controls to support a weak currency,

The exchange controls made it more difficult for speculators to work. They faced uncertainty created by the controls. This left the field open to people with inside information obtained from government agencies in charge of the system of controls.

Nixon undermined Bretton Woods in August 15, 1971, when he unilaterally froze retail prices, closed the gold window, imposed export controls, and floated the dollar. The system never recovered.

The Wikipedia article on capital controls summarizes the shift of opinion on controls.

Capital controls were an integral part of the Bretton Woods system which emerged after World War II and lasted until the early 1970s. This period was the first time capital controls had been endorsed by mainstream economics. In the 1970s free market economists became increasingly successful in persuading their colleagues that capital controls were in the main harmful. The US, other western governments, and the international financial institutions (the International Monetary Fund (IMF) and World Bank) began to take an increasingly critical view of capital controls and persuaded many countries to abandon them.

This change of opinion in favor of free markets over capital controls did not last.

After the Asian Financial Crisis of 1997-98, there was a partial shift back towards the view that capital controls can be appropriate and even essential in times of financial crisis, at least among economists and within the administrations of developing countries. By the time of the 2008-09 crisis, even the IMF had endorsed the use [of] capital controls as a response.

But there was a change in opinion regarding the kinds of controls. They are now seen as a way to keep people from buying a national currency (currency "inflow"), not selling it (currency "outflow"). What Switzerland's central bankers are now contemplating is becoming conventional opinion.

In late 2009 several countries imposed capital controls even though their economies had recovered or were little affected by the global crisis; the reason given was to limit capital inflows which threatened to over-heat their economies. By February 2010 the IMF had almost entirely reversed the position it had adopted in the 80s and 90s, saying that capital controls can be useful as a regular policy tool even when there is no crisis to react to, though it still cautions against their overuse. The use of capital controls since the crises has increased markedly and proposals from the IMF and G20 have been made for international coordination that will increase their effectiveness. The UN, World Bank and Asian Development Bank all now consider that capital controls are an acceptable way for states to regulate potentially harmful capital flows, though concerns remain about their effectiveness among both senior government officials and analysts working in the financial markets.

By "harmful," the bureaucrats mean "free market-driven." This is mercantilism: protecting exporters. The controls did this under fixed exchange rates, too. But the motivation has changed. The controls are imposed to stop people from being able to buy a national currency, not sell it.

By 2009, the global financial crisis had caused a resurgence in Keynesian thought which reversed the previously prevailing orthodoxy. During the 2008-2012 Icelandic financial crisis, the IMF proposed that capital controls should be imposed by Iceland, calling them "an essential feature of the monetary policy framework, given the scale of potential capital outflows." In the latter half of 2009, as the crisis eased and financial activity picked up, several emerging economies adopted limited capital controls to protect against potential negative effects of capital inflows. This included Brazil imposing a tax on the purchase of financial assets by foreigners and Taiwan restricting overseas investors from buying time deposits.

Keynesianism is mercantilism. It always has been. It is the belief that Keynesian-trained bureaucrats have superior judgment to the knowledge possessed individually by investors and entrepreneurs regarding what is good for a nation's economy. It is the belief that subsidizing exports is a good idea. How? By means of a trade deficit and a national government deficit. It is the position known as "beggar thy neighbor" with exports. Capital flowing in has the effect of raising the value of the currency and therefore reducing exports.

Those few Americans who worry about capital controls in the future are operating in terms of the old system, pre-1971. They worry about restrictions imposed on Americans who are trying to get out of dollars and into a foreign currency. The pre-1971 threat was that this would create an outflow of gold, which had a government-subsidized price: $35 per ounce. Once Nixon ended the gold exchange standard, this threat disappeared. So, the likelihood of this kind of control system is remote.

Why would the U.S. Treasury bother with capital controls today? What would be the overwhelming advantage for the government? There is none.

The Treasury would risk losing foreign central bank purchases of Treasury debt by imposing controls on currency "inflow."

Economic losses imposed by the controls will reduce tax revenues. The federal deficit will get larger. This will put upward pressure on interest rates, which then threaten to bring on a recession.

This is why major governments rarely impose capital controls on outflows of money. (Once again, there is no "outflow." There is merely an exchange of ownership at a rate that decreases the value of the domestic currency.) The centrality of the U.S. dollar in world trade rests an open pricing system for the dollar. If this is removed by law or dictate, the U.S. will suffer economic decline. The great advantage of the U.S. dollar is that the Treasury can borrow dollars from foreigners and pay the interest on these debts in dollars and at close to zero percent interest. No other nation in history has possessed such an advantage. They do not want to stop the "inflow" of foreign currencies to buy dollars to buy Treasury debt.

Economists in the Treasury Department know this. Bureaucrats in the Treasury know this. That Barney Frank and Sander Levin do not understand this comes as no surprise.


I do not expect currency controls imposed by the U.S. Treasury on the "outflow" of dollars. I think the negatives offset special-interest benefits. Capital controls on a capital-importing nation could be devastating.

The United States is a capital-importing nation, to the tune of $500 billion a year. The balance of payments deficit measures the size of the net importation of capital. This reduces exports, but it grants to the Treasury a unique benefit: borrowing dollars from investors all over the world, and paying interest in dollars. I don't think the Treasury will change the system. It is too good a deal for the Treasury.

May 30, 2012

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright 2012 Gary North

-- Posted Wednesday, 30 May 2012 | Digg This Article | Source:

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